It’s a startup truism: Investors fund people, not ideas. But ideas are much easier to assess than people. So how do venture capitalists decide if an entrepreneur is worth millions in funding?

The easy answer is: They look at the founder's resume.

“The mantra in our business has always been ‘serial entrepreneurs,’” says Bob Ackerman, managing director at Palo Alto-based venture firm Allegis Capital. “These are people who have demonstrated they know how to navigate the minefield that lies in front of every startup. If they get through it successfully once, the bet is they can get through it the next time. In our current fund, two-thirds are serial entrepreneurs. And that shows up in the performance of the fund.”

Going Beyond the Obvious

That’s reasonable. But it’s obvious.

What about finding the next boy genius? The next Larry Ellison or Bill Gates or Marc Andreessen or Mark Zuckerberg? They’re all entrepreneurs who built significant companies (to put it mildly) on their first try. How do VCs and angels identify people like that, who will step up to the plate and hit a grand slam in their first at-bat?

That’s where judgment and experience come in. And that’s why many top VCs are former operating executives themselves. The idea is that experience can help them peer into the soul of first-time entrepreneurs and see if they have what it takes to get through the minefield. Are they coachable? Do they listen? Yes, they need the passion and enthusiasm, but they also need to keep one foot on the ground?

“The history of startup founders making it all the way to exit tells you the deck is pretty much stacked against them,” Ackerman says. “But there are examples of those who do it.”

He recalls a first-time entrepreneur he funded named Scott Weiss, who started a company called IronPort - and sold it to Cisco for $830 million. “When I looked at Scott, there was the confidence and bravado you would expect from an entrepreneur,” Ackerman recalls. “But behind that bravado was a lot of hard work, a lot of solid research and a lot of solid validation. I looked under the hood and found a tremendous amount of substance.”

The first time they sat down, Weiss asked Ackerman who in his network had managed a company that had experienced the sort of growth Weiss was expecting for IronPort. He said up front that IronPort was his first try and that he wanted to connect with veterans who could tell him right away if he started veering off track.

Maturity… and a Map

“To me, that demonstrated a tremendous amount of maturity,” Ackerman says. “Yes, he had that aggressive drive and enthusiasm and confidence, but also the realization that he could step on a mine anytime along the way and lose his whole thing. And he wanted to make sure he didn’t make those mistakes. I loved that.”

There are two ways to navigate a minefield. You can do it by braille. Or you can get a map.

“We look for entrepreneurs who go get the map,” says Ackerman, “who are prepared to do the hard work to develop that map rather than just rush through the minefield, hoping they’ll get through. Venture is all about people. An ‘A’ idea with a ‘C’ team has low probability of success. A ‘B’ idea with an ‘A’ team is a much better bet.”

The dreaded pink slip - it’s still an all-too-common occurrence in America today. Despite an economy that appears to be on the road to recovery, there are still too many Americans being laid off every day. So what are we going to do about it?

Most unemployed Americans have only a few options. Most spend their days applying for jobs, not just because they need the opportunity to work and earn a living, but also because job searching is a prerequisite for collecting unemployment compensation.

To entrepreneurial types this seems like a no-brainer. Scott Gerber - ReadWriteWeb contributor, founder and president of the Young Entrepreneur Council, and a leader in the movement to #Fix Young America (Senator Wyden, in fact, wrote a chapter in Gerber’s #Fix Young America book addressing this topic) - says SEA is “just common sense… and a simple realization of the new reality of the startup economy.”

Big Government - or Small Business?

There are, of course, those who say SEA won’t work, that it’s just another “big government” program. Gerber counters that argument this way: “Government can’t cure all woes. But there are certain things the government can do, like remove barriers." More to the point, he continues, "It’s obvious that long-term unemployment solutions like sending resumes isn’t working.”

Actually there’s more fodder to support SEA, which isn’t exactly a new idea. Wyden first wrote legislation to “empower states to provide unemployment compensation to individuals for the purpose of funding self-employment” back in 1985.

And just a few years later - in the early 1990s - two demonstration projects (allowing people to start businesses with their unemployment benefits) were created in Massachusetts and Washington state. The results? Researchers concluded SEA projects “increased the likelihood of self-employment and the amount of time participants were employed.”

Additional research looked at SEA programs established in the late 1990s in Maine, New Jersey and New York. That study showed SEA participants “were 19 times more likely than non-participants to be self-employed at any point after their period of unemployment, and were four times more likely to have obtained any type of employment.”

There’s more. Oregon has been operating an SEA program since 1995, and a survey shows nearly half of its program’s participants have created an average of 3.12 new jobs. SEA programs, says Senator Wyden, turn unemployment insurance into “job multipliers.”

Who Qualifies?

You can’t just say you’re starting a business to qualify for the SEA program. Those eligible to collect unemployment must have a “viable business plan” and “be working full-time” to launch “a sustainable business.” If you qualify, you will be able to collect your unemployment benefits for a maximum of 26 weeks, even though you are not searching for full-time employment.

To some startups an unemployment check may seem too small and trivial to make a difference. But during startup, every dollar counts. And as Gerber says, “A lot of little somethings will help move the economy forward.”

The White House and the Department of Labor want to encourage other states to adopt SEA as soon as possible. States must apply for the grants by June 30, 2013.

In the grand pantheon of disgraced technology company CEOs, the resume blunder of ousted Yahoo Chief Executive Scott Thompson seems almost trivial. Claiming an unearned degree pales in comparison to the true titans of tech transgressions - whose careers were toppled by everything from massive fraud and grand larceny to inappropriate dalliances with underlings. Each imploded in their own particular way, but all their stories come mixed with heaping helpings of arrogance and a dollop of coverup.

Here’s your chance to meet the real world of Horrible Bosses, and get a glimpse of how they were rewarded - or occasionally punished - for behaving badly:

Scott Thompson, Former Yahoo CEO

Scott Thompson was at Yahoo’s helm only five months before getting the boot for claiming to have a computer science degree from a college that didn’t offer one at the time. While a charitable observer might say he never lied, Thompson also never explained how that erroneous info got on his work bio. Nevertheless, the untruth gave investor activist Dan Loeb just what he needed in his proxy battle to stack the Yahoo board with his supporters. Thompson was given the heave-ho this month and Loeb, who runs the hedge fund Third Point, got the board seats. Thompson didn’t leave empty handed. While he missed out on a severance package, he did walk away with $7 million in bonuses from the struggling Internet portal.

Brian Dunn, Former Best Buy CEO

Brian Dunn stepped down in April as chief executive of electronics retailer Best Buy for what the company later called an “extremely close personal relationship” with a female employee more than 20 years younger. The 51-year-old Dunn did not use company resources in his “friendship,” which included lunch and drinks during the workweek and on weekends. The pair also seemed to stay in touch a lot. During two separate trips abroad for a total of nine days, Dunn contacted his “friend” by mobile phone at least 224 times. In the end, the board found that Dunn’s behavior violated company policy, yet he was still entitled to some big bucks. His separation package totaled $6.6 million.

Mark Hurd, Former Hewlett-Packard CEO

Mark Hurd resigned in August 2010 as chief executive of tech giant Hewlett-Packard following a dalliance with a contract employee who later accused Hurd of sexual harassment. While investigating the allegations, the HP board found that Hurd had doctored expense reports in order to hide his personal relationship with marketing consultant Jodie Fisher, a former soft-core porn actress. Fisher denied the relationship with the married Hurd was sexual. She settled privately with Hurd and both sides agreed not to discuss the affair. Hurd left HP with $12.2 million in severance and enough stock to earn millions more - and was immediately hired by his friend Larry Ellison as co-president, director and board member of Oracle.

David Edmondson, Former RadioShack CEO

David Edmondson resigned in February 2006 as CEO of electronics retailer RadioShack after lying about his education. Edmondson topped Yahoo’s Thompson by claiming to have two college degrees when he had none. The CEO apologized for the “embarrassment” he brought to the company. RadioShack’s hometown newspaper, The Fort Worth Star-Telegram, broke the story, reporting Edmondson never graduated from the unaccredited bible college he attended. The newspaper also found that the CEO was facing a trial on his third arrest on drunk-driving charges. Edmondson left the company with a severance payment of less than $1 million in cash.

Sanjay Kumar, Former Computer Associates CEO

Sanjay Kumar, ex-CEO of IT management software and solutions company Computer Associates, pleaded guilty in 2006 to his role in a $2.2 billion accounting fraud. He also admitted to interfering with a federal investigation by authorizing a payment of $3.7 million to silence a potential witness. Kumar, who was once a part owner of the New York Islanders hockey team, was sentenced to 12 years in prison, which he started serving in 2007. Computer Associates, which later changed its name to CA Technologies, paid more than $225 million to a shareholder restitution fund. Kumar contributed about $20 million from his own assets.

John Rigas, Founder, Former CEO of Adelphia Communications

After leading Adelphia Communications for more than five decades, Chief Executive John Rigas was sentenced in 2005 to 15 years in prison in a multibillion-dollar fraud case that collapsed the company he founded. Rigas and his son Timothy Rigas, who was Adelphia’s chief financial officer, were convicted of 18 felony counts of fraud and conspiracy. The younger Rigas got 20 years in prison. The Rigases were convicted of stealing $100 million from Adelphia, which had been the fifth-largest cable company in the nation. They also were found guilty of conspiring to hide $2.3 billion in company debt.

Bernard Ebbers, Former CEO of WorldCom

Bernard Ebbers was sentenced in 2005 to 25 years in prison for leading the nation’s largest-ever corporate fraud. The former chief executive of telecom carrier WorldCom was convicted of nine felonies in an $11 billion accounting scandal at the company. When WorldCom filed for bankruptcy in 2002, it was the largest in U.S. history and led to shareholders and employees losing billions of dollars. Ebbers forfeited the bulk of his assets to burned WorldCom investors. Those assets included a Mississippi mansion and other holdings worth as much as $45 million. The day before his sentencing, Ebbers called the predicament he was in “bizarre.”

Robert McCormick, Former CEO of Savvis Communications

Robert McCormick resigned in 2005 as chief executive of IT infrastructure management outfit Savvis Communications (now owned by CenturyLink) after it was revealed that he spent $241,000 entertaining business associates at a Manhattan strip club. The company’s board might have looked the other way, if McCormick hadn’t used his corporate charge card to pay for lap dances and then claim to be a victim of fraud when American Express demanded its money. Dubbed the “The Lap Dunce” by The New York Daily News, McCormick never submitted an expense report for the party at Scores. The company claimed it did not pay for McCormick’s night out on the town.

Joe Nacchio, Former CEO of Qwest

One-time Qwest CEO Joe Nacchio was convicted in 2007 of 19 counts of insider trading and was sentenced to nearly six years in prison. Nacchio was convicted of selling $52 million in stock in 2001 after it became known internally that the telecom carrier (also now owned by CenturyLink) was in danger of missing sales forecasts. Nacchio, who resigned in 2002, was ordered to forfeit almost $46 million and pay a $19 million fine. In 2011, Nacchio sued his lawyers from prison, claiming they were negligent. He also accused them of overbilling, pointing to charges that included lawyers' underwear purchases.

Gregory Reyes, Former CEO of Brocade

Gregory Reyes was convicted in 2007 in a stock options backdating scandal at networking solutions vendor Brocade and received a 21-month prison term. The conviction was later overturned and the ex-CEO was retried. Prosecutors won again and he was sentenced in 2010 to 18 months in prison. At his second sentencing hearing, Reyes broke down crying, and his attorney had to read his statement for him. At his second criminal trial, Reyes blamed the company’s outside counsel, which he claimed signed off on the backdating of stock options. The judge at the sentencing hearing didn’t buy the argument, saying that, at some point, people have to take responsibility for what they say and do.

"We can gamble in Vegas. We can donate on Kiva or Kickstarter. But it's illegal to purchase $100 of stock in a job-creating business? That makes no sense."

That is the tagline to a new project called WeFunder from three TechStars Boston alum who are trying to garner support for the "Democratizing Access to Capital Act" (S.1791) that would allow entrepreneurs to crowdfund startups. Launched yesterday with the hopes of getting $100,000 from 100 pledges, the guys behind WeFunder have already seen near $3 million in promised funds from more than a 1000 supporters if the Senate passes the bill.

Different From A Kickstarter Project

The notion of crowd funding a startup is fundamentally different than that of endorsing a project on Kickstarter. At Kickstarter, people fund projects and have no ownership over the project once it is completed. It becomes a lot more complicated when the notion of investing in actual companies is taken into account.

Right now, the only entities that can invest in startups are those that are accredited investors such as venture capital firms or venture banks. What the Democratizing Access to Capital Act of 2011 would do would be to amend the Securities Act of 1933 that outlines when and how investments in companies can be made through the Securities and Exchange Commission. This is where a mess of SEC rules and regulations come into play. Many of the regulations that the SEC implements are designed to protect the investor. The Securities Act of 1933 was put in place in 1933, four years after the 1929 market crash that led to the Great Depression and caused many affluent American's to lose their fortunes. It was a necessary act that helped protect people but also spur U.S. businesses. To a certain extent, the Democratizing Access to Capital Act fits in the same realm.

Sponsored by Sen. Scott Brown of Massachusetts, the bill comes three years after the market bust in 2008 that started what we now refer to as "The Great Recession." Many political and business leaders in the U.S. are looking toward the technology sector to lead America back to the heights of economic prosperity. The Wall Street Journal today published an article saying that the next economy will be based on three pillars: big data, smart manufacturing and the wireless revolution. It is clear that the U.S. has the technological prowess to create a dynamic new economy. Yet, with capital markets spread thin, the next big American company working on a technological advance could die for lack of funding before it even gets its feet off the ground.

Tremendous Impact

The impacts of the Democratizing Access to Capital Act could be tremendous. It would open up the flow of cash to startups from real people. The act would allow a single non-accredited investor to put money into a startup they has the power to create jobs.

"Think of it as Kickstarter for equity, where everyday non-accredited individuals can invest up to $1k in a startup they believe in," said Daniel Sullivan, one of the founders of WeFunder and the founder of crowdsourcing startup Crowdly. "I think this is a really important issue that involves how the general tech consumer can help drive the economy."

The other two founders of WeFunder are Nicholas Tommarello of Escapist and developer Nick Plante.

Some may think that startups like WeFunder are looking to disrupt the venture capital industry. That is far from the truth. Venture capitalists and bankers are not going anywhere. Startups still need guidance, mentors, legal support and infrastructure that VCs can offer them. They also have more money and better insider knowledge than the individual non-accredited investor. For example, just look to the $2.7 billion that VC firm Andreesen Horowitz has raised in the last three years. What the Democratizing Access to Capital Act does is lower the bar for the transference of money for startups looking to build a great idea. The ability of money to flow freely across the ecosystem should be of great benefit to all involved.

There comes a time in the life of any startup where the founders look at each other, let out a sigh of relief and say, "we're going to make it." Startup founders and their first employees work countless hours making sure the product is functioning, helping clients and customers and responding to mini-catastrophes that crop up all over the place like wild fires during the Santa Ana winds.

The founders of Boston-based startup Promoboxx must be breathing that sigh of relief. Promoboxx has landed a deal with Chevy to power its Super Bowl commercials from local dealers. Yes, that Super Bowl. The one where Madonna is playing the halftime show this year. How did a little startup out of TechStars Boston make it to the biggest stage in the world?

Chevy will utilize the PromoBoxx platform to engage its 6,000 dealers with co-branded campaigns designed for each specific dealers. The commercials are being released before the Super Bowl and local dealers are given tools to promote their own specific version of the campaign online through email, Twitter, Facebook and their own websites.

Think about the logistics behind that for a second. That is 6,000 dealers with their own co-branded commercials. Each dealer has thousands of customers. That is a lot of very specific, locally targeted marketing going on. That means that Promoboxx's platform needs to be very robust and scalable to deliver content at rates that size.

"We built it to be a cloud scalable platform that is able to handle practically simultaneous infinite users and large national brands" said Jamie Fiedler, lead engineer at Promoboxx.

To accommodate Chevy, Promoboxx had to create new user interface and unique experience for each of the 6,000 dealers. That is not easy. Promoboxx teamed with Big Fuel, a social media company out of New York, to handle the issue.

"The design and development team was updating the Promoboxx dealer engagement portion of the platform at the same time as they were revamping the entire product," Promoboxx CEO Ben Carcio told ReadWriteWeb. Therefore, all of this new technology being developed will morph into the overall product offering. This made the Promoboxx technology team realize how flexible the product needed to be when working with such large brands, which forced them to build a Modular RESTful API."

Promoboxx focused on creating a flexible backend to handle the needs of each specific dealer. This will be the biggest test for Promoboxx. With 6,000 dealers of varying degrees of technological prowess, the platform needs to be simple enough to be everything to everybody.

"The way the process works can vary per brand, so the importance of a flexible API/backend was super crucial. There wasn't a defined path that every company or dealer would follow, so flexibility was an essential part," said Fiedler.

Super indeed. Super Bowl that is. Promoboxx has likely hit an inflection point in its evolution. The company got its first big break. Now the real work starts.

Yesterday, I wrote a short review of a new mobile app from Webscorer that has a curious lineage. The startup came to be from a group of several ex-Microsoft developers and is led by Vesa Suomalainen. I have known Vesa for many years, and first met him when he ran Microsoft's mainframe communications business with a product called Host Integration server. This was back in the 3270 terminal emulation days and was quite the advanced product for its time. Vesa shared with me some lessons that he has learned with several botched startups since then and what he is trying to do with his latest venture.

What is interesting about some of these points is how different the kind of company that Vesa is creating from what his team came from in Redmond. It is almost as if everyone learned how little they liked the BigCo mentality and have purposely tried to make things small.

Don't be optimistic. Plan that you will struggle initially, and this way you won't end up diluting all (or even much) of your startup capital. "It is always better not to take any outside money and pay everything on your own dime," he told me. Agreed. This means that you have to start off small.

Set your sights lower."You don't want to conquer the world, just make a small adjustment over time." Vesa talks about having an excellent niche product that is highly profitable rather than shooting for the stars and failing and losing your entire company. That is what he is trying to do with the racing scoring app.

Know what not to do. Learning from your mistakes is just as important as success. Vesa's failure taught him more about what not to do with his present venture. "Watching a startup destroy itself was a very potent teacher." Speaking of which, note: "There are lots of ways to fail, but only one way to succeed." Sounds like something Yoda might say to young Luke.

Don't make too many promises that you can't keep. Understand scope creep and keep it under control. Eliminate buttons, reduce functionality, and keep things simple. Resist the temptation to make your product more complex at every turn.

Don't be greedy, share your equity with your key founding members. Even if it is a small percentage, you want to retail your key developers and engineering talent. Nothing says loving more than some points of equity.

I've found myself thinking a lot about the research being conducted by the Startup Genome Project these days. The data is an absolute goldmine and provides quantitative benchmarks for issues I've thought about for years. One of the findings from their first report was:

"Most successful founders are driven by impact rather than experience or money."

This certainly maps to my experience as a founder and also working with other entrepreneurs. However, in most cases it's a little more complex than that, as I find a number of goals typically intertwine to get people to jump in and start a business.

There are players in the ecosystem driven by other goals, such as job creation. For example, the Kauffman Foundation, an institution I partnered with when I was a research fellow Carnegie Mellon and continue to hold in very high regard, has proposed the Startup Act as a way to encourage entrepreneurs and strengthen the economy.

As part of this, they produced an excellent 3 minute video (embedded below) talking about what entrepreneurs do and specifically highlighting their role in birthing innovations, creating jobs and producing net new wealth.

I certainly wouldn't disagree with any of these outcomes from successful founders or a program that makes the economy more entrepreneur-friendly.

However, getting back to the original question of this post, given the community here at ReadWriteStart, of entrepreneurs and also supporters of entrepreneurs (such as investors), what motivates you? Please leave your answers in the comments below and also explain your role in the ecosystem.

While certainly not every business needs to raise venture financing, it is the path for many high-growth technology startups. Therefore, going down the fundraising path is something many technology entrepreneurs will need to do and is a critical step in the development of their business. This can be an intimidating experience so I've put together a list of five tips for raising a venture round. This is by no means an exhaustive list so I'd love to hear other suggestions from you in the comments of this post.

Tip 1: Make Sure You Are Ready to Scale

First, before you even start the process of raising a lot of money, make sure you have figured out your model and are truly ready to scale. Earlier this week on ReadWriteStart, Steve Blank used research at The Startup Genome Project and explained:

One of the biggest surprises is that success isn't about size of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup, and death.

If you're early in the investment process, a small angel round or partnering with an accelerator may be the best approach. In fact, research conducted by the Startup Genome Project found that the best practice in the first phase, a.ka. discovery, is to only raise between $10,000 and $50,000.

Tip 2: Have A Real Lead

Next, if you are going to raise a round, find one or two partners to do it with. As Mark Suster pointed out yesterday on his blog, he's seeing more and more cases where "entrepreneurs are working hard to make sure they have as many VC names and famous angels on their cap table for signaling value." He explains five problems with this and I couldn't agree more. Remember, once you screw up your cap table it's really hard to go back. So in your first few funding rounds, try to raise money from as few people as possible and make sure they really will help.

Tip 3: Conduct Diligence on Your Potential Investors

When you get close to finding a lead, don't be afraid to ask to speak to some CEOs who have worked with the firm. They are going to poke and prod your business to figure out if you're someone they want to work with. You should figure out the same thing. Pay special attention to investors who are willing to introduce you to CEOs of their portfolio companies that went through hard times. This is when your potential investor will really show how committed they are to the companies they invest in.

Tip 4: Really Understand Key Terms

Once you get the term sheet make sure you know how to read it. I strongly recommend reading Brad Feld and Jason Mendelson's Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. This will give you tons of information on all the terms you'll encounter when raising a venture round and how they could impact your deal. This includes things like how liquidation preferences impact future rounds and ultimate liquidity, to why VCs ask to expand an option pool before investing as part of their term sheet. Too many entrepreneurs focus exclusive on the valuation number and this book can really help you understand all the implications around the term sheet you receive.

Tip 5: Remember Time Kills Deals

Once you have a term sheet you are happy with, don't over negotiate. You have a business to run and more importantly don't forget one of the first principals of any sales process: "time kills deals". The worst thing that can happen is for you to drag your feet over some meaningless terms (which you'll understand are meaningless thanks to reading Brad and Jason's book above) and end up having your potential investor get cold feet or even have something that's outside your control change. Just get the deal done once you're happy with the material terms and have an investor you trust and want to work with.

Bonus Tip: Run a Great First Board Meeting

When the cash is in the bank, you're not done; in fact you are just starting. Once you've raise your round, you'll almost certainly end up with at least one new board member. It's really key that you run a great first board meeting at this point. If this is your first round, this may be the first formal board meeting you've had, so prepare for it and make sure you know what you want to accomplish. This will set the tone for future board meetings so make sure that board members take your meetings seriously. There are a number of great posts on this topic and I may try to summarize these in a future post, but one of my favorites for now is from Guy Kawasaki on "The Art of the Board Meeting."

As I said at the beginning of this post, this isn't an exhaustive list. I'd love suggestions in the comments below for other tips when raising a venture round.

If you haven't read my colleague Scott Fulton's post on "The Steve Jobs Formula and Why It Works" go read it right now! It's a very insightful piece written by an expert who literally watched Apple grow up, and there are plenty of lessons for all entrepreneurs in the Steve Jobs formula he spells out. However, to be "fair and balanced" here at ReadWriteWeb I think it's also important to point out some things that as an entrepreneur you'd be well served to disregard. What follows are four factors of the Apple formula to ignore. I'd love to hear what you agree and disagree with in the comments below as well as other factors that should have been included.

Don't Be Secretive...Go Anti-Stealth

Steve Jobs is notorious for how secretive he is. Every product is built in isolation, and while the details of Apple's product development process are not that open either from what I've heard, often engineers don't even have a full picture of the product they are building.

A few months ago, returning from SxSW, I wrote about my concerns about the increasing percentage of business I heard that were building "stealth." As I pointed out in the post, there are three big advantages to building your business in anti-stealth:

Leveraging product feedback earlier in development

Building a reputation and community in your target market

Building relationships with potential investors pre-fundraising

Don't Expect a Perfect Version 1.0 ... Release Early & Often

Related to this first point, there was an expectation when Jobs stood in front of a crowd to unveil a new product that it was going to be truly amazing, groundbreaking, revolutionary and life changing. As an Apple fan, I must admit I do truly find myself feeling that way about my iPhone, iPad and MacBook Pro. However, as Reid Hoffman is famous for saying, the better advice for most entrepreneurs is to be embarrassed by their first product.

Basically, I think this one comes down to the fact that very few teams are as strong as the team that Apple assembles, in terms of understanding what a group of people want and building that with limited feedback. In other words, you are no Steve Jobs or Jonathan Ive and so it's extremely unlikely you'll predict as accurately as they what needs to be built. Instead, think about testing your idea before you write your first line of code.

Don't Start Building in Isolation...Look to Swarm Existing Communities

Apple basically starts with the assumption that it can build a community from scratch instead of swarming an existing one. This works for them in most situations - although I think there are even examples where this hasn't worked for Apple (Ping).

As an entrepreneur, this is foolish. I had the pleasure to meet Chad Hurley for coffee a few months before he sold YouTube to Google because we had a close mutual friend. One really interesting thing he talked about, which I've found myself reflecting on often over the years, is that both PayPal and YouTube were businesses built to swarm existing platforms with unmet needs (payment on eBay for PayPal and videos on MySpace for YouTube).

Now obviously over time as both - but especially the YouTube/MySpace example - show, you may becoming larger then the platform you start with, but it's very helpful to find an existing large community with a need for what you're offering to get started.

Don't Be Closed...Create an API Day 1

Apple products are also notoriously closed. In fact, they are so notoriously closed that Alex Payne wrote:

"The thing that bothers me most about the iPad is this: if I had an iPad rather than a real computer as a kid, I'd never be a programmer today. I'd never have had the ability to run whatever stupid, potentially harmful, hugely educational programs I could download or write. "

"I think it's important to make your application programmable, and make it possible that others can build on top of or connect to or add value to, in some way, your Web application. That means API's, and in my opinion read/write API's...Not all of our companies, by the way, have launch read/write API's, and we're constantly hounding them to do that, but the important thing about programmability is that when people can add value to your application, they are in effect adding energy to your application, bringing more users to your application, and also bringing more data and more richness to your applications."

So as I said at the beginning, I'd love to hear other factors you think entrepreneurs should avoid from the Steve Jobs formula, or things I've included you disagree with, in the comments below.

I had lunch with one of my favorite Internet entrepreneurs today, Mark Sawyier, the CEO of Off Campus Media. The company provides college students with apartment listings near their schools, and what started out as an idea five years ago is now a multi-million dollar business. Sawyier came to this business without any formal training in computer science, business, management, or other technology training, yet he is a natural when it comes to running a modern-day Internet business. In the short time we spent today, he came up with a few bon mots and wise thoughts that I want to share with those of you that are thinking about starting your own businesses.

Know your site demographics. Sawyier checks Google Analytics and other website tools daily and understands how his search rankings and traffic patterns change and what he has to do to keep the page views coming.

Know your business plan is wrong and keep tweaking it in real time. Anyone who tells you that they have things figured out right off the bat is just plain lying. Don't be afraid to make your biz plan a living, breathing entity.

Don't be afraid to leave town to get more money. St. Louis is not the hotbed of VC activity and especially not for Internet firms. Sawyier went to New York City to get investment capital and is most likely to go there for additional rounds.

Understand your distribution channel, or how you reach your customers. Sawyier early on hired college students on different campuses to promote his service and get landlords and property owners involved in listing their properties. Having feet on the street was a good complement to gaining market share and attention, especially for an Internet business. Don't just rely on Facebook friends and other virtual methods in building your channel.

Take risks, innovate constantly and learn from your mistakes. You aren't selling soap or machine tools. If you have an online business, you need to be continually trying out new ideas and seeing how they fail and figure out what the next tweak will be. Think of this as akin to agile management and don't be afraid to take small risks to learn how to improve your offerings.

Organic search is more art than science. But you need to understand how the daily tweaks that Google makes to its algorithm will influence your rankings and what you have to do to adjust your page content accordingly. If you don't know how to use these tools, watch some videos and learn, and more importantly, figure out what metrics and stats you need to know to be effective. As Mark has told me before, "at the end of the day, the most important thing is having a website that provides the right answers and information to the searchers."

It is all about your content. Moving Off Campus, his major venture, has tons of content - some 80,000 individual pages, let alone hundreds of thousands of apartment listings. But the content is relevant to one particular audience and one only: college students who want to move out of the dorm, and listings for just their immediate geographic area surrounding the campus. And because the firm is so laser-focused on this content and his audience, he can charge a higher premium for his search traffic than general real-estate want-ad listings.

You may not be familiar with Betaworks but you certainly are familiar with some of their companies: Tweetdeck and Summize (both acquired by Twitter), as well as other startups still independent (at least for now) like Bitly, Social Flow, Chartbeat and news.me.

The focus of our conversation will be on the lessons John has learned about designing products and businesses for the emerging Web. As a general framework to explore these lessons I'm planning on talking to John about the past, present and future of Betaworks.

As fellow entrepreneurs, I'd love suggestions from the ReadWriteStart community on topics you'd like to see discussed. To get the creative juices flowing you can check Richard MacManus's twopart interview with John our our site last year.

In my last post on ReadWriteStart, I talked about how, in many cases, it wasn't an advantage to build your start-up in stealth mode. As a continuation of that theme, I thought it would be interesting to explore five tools you can use to iterate and improve your startup idea before writing one line of code. There is nothing worse than building a tool no one is interested in, so I'd encourage you to consider these options before starting down the path of building your next startup.

Specifically, these five tools can help you do three critical activities before starting to write a line of code: create a wireframe, get feedback from the target market and test value proposition through multiple landing pages.

iMockups for Wireframing Concepts

If a picture is worth 1,000 words, then a good mockup is worth 1,000 lines of code. If you own an iPad, iMockups is a killer solution to quickly and efficiently create wireframes. It's been interesting to watch a number of the startups I advise shift from trying to use PowerPoint or Keynote to flesh out concepts, to using iMockups. The feedback from those startups has consistently been that the iMockups tool makes it so much faster to put wireframes together that the time savings was well worth the $10. Check out the video below to see iMockups in action:

Feedback on Concept from Target Market

Once you've got a concept put together, it's often valuable to get some early feedback from your target market. Obviously, in many cases this can be done by setting up meetings with your target customers and walking them through the idea.

Another simple and relatively low cost way to get feedback from a critical mass of potential users is to use Ask Your Target Market. While there are a lot of online survey tools, the nice thing about this tool is it has developed a great network of respondents (or "panel" in market research parlance) who you can target for response. This allows you to get statistically meaningful feedback from a specific target audience.

Build & Test Landing Pages

A final obvious technique to testing and improving your idea is to build some landing pages to test out different value propositions.

LaunchRock: We've covered them a few times before, but with tools like LaunchRock that have automated the process of developing these landing pages this is a great way to test interest and get signups.

If you aren't familiar with LaunchRock, see the video the team did for a demo with Robert Scoble:

A/B Testing Different Value Propositions: To take this approach to the next level, you can even use a solution like Optimizely, Google Website Optimizer or Sumo Optimizer. For a thorough review of these options check out this analysis on our SMB channel ReadWriteBiz of the tools. The general technique of optimizing your landing page is a practice most startups should do. But before you build out your solution you can actually see which value propositions and features are more compelling by testing which call to action - for example "find new sources of information" vs "filter the information you already read" - gets a higher percentage of requests from users.

Conclusion

As an entrepreneur, you have to figure out the right plan to test and build your product. However, locking yourself in a room and designing and then building your product is rarely optimal. Before opening your IDE of choice, maybe the best step next time is to launch one of the tools mentioned above and started getting some feedback? Do you have other techniques to test out your ideas? Let me know in the comments below.

Personalized news recommendations on the go - that's the dream of many an online news nerd and the startups that would serve them. One strong entrant into this field is My6Sense, a well-designed, venture-backed, Israeli company that uses implicit behavioral data from users to recommend the most relevant content in your personal river of news.

It's a good service, and one you're likely to hear a lot more about soon. The company will announce this week that it has hired Louis Gray, a self-made Silicon Valley internet celebrity and startup consultant, as its VP of Marketing and first US employee.

The Good Stuff Machine

Using My6Sense is easy. We first reviewed it last Summer, but here's how it works. Sync your Google Reader, Twitter, Facebook or other account, or add default recommended streams. Click through and read, share or delete the stories you do or don't like. It's a well designed feed reader. Then, the service will learn what you like and offer two views: most recent and most relevant news for you.

There are many apps that offer personalized mobile news reading experiences. Many people believe that mobile recommendation technologies are to the future what web search was to the previous iteration of the web.

My6Sense is the one most closely aligned with your existing streams of content. I have a very large list of subscriptions in Google Reader and the latest version of the app was able to pull those feeds down and let me read them very quickly. After one session of using the app, it started offering me a recommended stream. The user experience is suitable for both beginning and advanced news feed readers.

Will novice web users, everyday people, care about a service like this? That will be the challenge faced by the company's new Marketing VP.

Hiring Louis Gray

My6Sense will announce this week that it has hired tech blogger Louis Gray as its first US employee. Gray is on the short list of the web's best examples of bootstrapping-by-blog. He's got an inspiring and accessible story.

Gray was the Online Editor for the UC Berkley student newspaper at the end of the 1990's. Shortly after graduating, he took a job marketing a firm that describes itself as providing "unified network storage systems to enterprise markets." After eight years of what sounds to me like a terribly boring position, Gray used his personal blog LouisGray.com to launch a new career.

In 2008, he started breaking news - often about tiny, experimental, new feed-reading services. He would find them in his traffic logs as referring URLs, reach out to the founders of the still-unlaunched startups and then write long, in-depth explanations of their features and strategies. It was a time when new startups were thought of as exciting and blog audiences cared about more than just Facebook, Twitter and Google.

TechCrunch and Robert Scoble began to link to his posts. He was beating them to stories, and writing well. He developed a following of like-minded feed-wonks on sites like FriendFeed and later, Google Buzz. He kept finding apps before anyone else, and writing about them in great detail.

Some of us wondered which leading tech news blog would hire Gray first, but we assumed that with eight years of experience as a marketer in enterprise software - he was out of the pay range of most upstart online news outfits.

Some times Gray takes on an air of undue self-importance, and sometimes he's too verbose. But he's a blogger, a person who built a career of his own choosing through hard work and the democratic power of free, easy, self-publishing technology. Such Old West style figures are never perfect, and they shouldn't be.

It was also unclear, and it still is, whether Gray can reach audiences outside of tens of thousands of news-feed magicians and other people who enjoy discussing things like the role of online user attention data standards in tackling information overload. (Saying there are tens of thousands of those people in the world may be generous, too.)

Some times Gray takes on an air of undue self-importance, and sometimes he's too verbose. But he's a blogger, a person who built a career of his own choosing through hard work and the democratic power of free, easy, self-publishing technology. Such Old West style figures are never perfect, and they shouldn't be.

In the Spring of 2009, Gray left his marketing job and co-founded a startup-advising consulting company. It made sense, these were the types of startups that got their first breaks being covered on his blog, and he offered good advice. Now, 18 months later, Gray says that company, Paladin Advisors, is still growing and hiring - but he's decided to join My6Sense, one of the group's clients, as an employee.

"It's good to feel like I can have an impact on the things that are most interesting to me," Gray told me today by phone.

"Often, bloggers feel like they have to sit on the sideline and comment. It can be easy to be an armchair quarterback, but it's quite another to get your hands dirty. Social networking is important - it's important that everyone has a voice and that you can share your voice in whatever medium is most appropriate for you. It's important to me to be an active participant in this market."

Louis Gray is a man with a family, who left a good job of many years to live the startup life. It's something he's able to do because he combined free online software with elbow grease. Now he's going to become the only US employee of a small startup that ingests feed reader subscription lists and implicit mobile news-reading behavioral data to power personalized content recommendations. That's really bleeding-edge stuff. He's doing it, he says, to get some skin in the game in an industry that's offering anyone in the world a voice, just like it did him.

That's pretty awesome.

Photo: Gray in 2008, with his twins wearing Google and FriendFeed outfits. Photo by Robert Scoble.

So you have a couple of people, a decent idea and that's about it - what next? If you're in the San Francisco Bay Area, then the answer might be Kicklabs, a new startup incubator launching today for very early-stage technology and online media startups. That answer, then again, might simply be investment by a venture capitalist, but the pros and cons of incubation should be evaluated first.

Kicklabs is a 23,000-square-foot space in the heart of San Francisco that hopes to help launch up to 20 startups in 2010, and already there are a number of companies on the roster. Focused primarily on early-stage companies consisting of two to eight members, Kicklabs will offer not only office space on a six to 12 month lease, but advisers (such as Blippy co-founder Phil Kaplan), investors and other entrepreneurs.

Why Incubate?

", there are ups and downs to getting incubator investment instead of venture funding that should be taken into consideration.

First, getting involved in an incubator can come at a higher cost, but offer value beyond that cost. As with Kicklabs, there are a number of other companies going through the same trials at the same time and there are a number of advisers who have been there before to guide you along the way. In return for the environment, office space, advice and investment, you give the incubator, Kicklabs in this case, a share of your company in either equity or stocks.

As Jordan Krechtmer, CEO of Livefyre, said in the Kicklabs press release, "Being around other startups who we can grow with is really important. The moment we walked into KickLabs we could feel the energy of the space."

On the other hand, operating under the same roof as your investors can come at a cost - your freedom. Graham argues that he thinks "it's better if startups operate out of their own premises, however crappy, than the offices of their investors." So, while the incubator may foster a creative environment, it may also foster a spirit of control. Perhaps it isn't the worst type of control, though, to have the advice of entrepreneurs who have helped grow companies like Google, Yahoo, Facebook, Digg, Monster and more.

In the end, whether or not to get your startup going with the help of an incubator is a personal question, but for our money, having the opportunity to grow a startup in the heart of Silicon Valley with the Kicklabs advisory team is one we couldn't see passing up.

Forget MTV's reality show "The Real World" - if you're considering getting into the startup game but want to get a glimpse of what's in store, then The Founders 2010 is for you. The weekly video series is in its second incarnation and follows three startup companies - content crowdsourcing service Grogger, mobile augmented reality platform creator Omniar and property management software RentMonitor - in their adventures through Techstars.

Techstars is a 90-day program that provides seed capital and mentorship for Internet startups. The program offers up to $18,000 in seed funding as well as "the chance to pitch to angel investors and venture capitalists at the end of the program", according to the website. From what we've seen, the program has quite the success rate, with nearly 70% of companies coming out of Techstars raising outside funding or becoming profitable on their own.

The series follows "the experiences of three companies throughout the summer in Boulder, Colorado from the time they arrive through investor day and beyond" and looks at what it means to be a startup going through Techstars.

In the first episode, David Cohen, the managing director for Techstars, explains that "when people think about the startup and why do you do it, they always think about the exit and getting out and making a bunch of money, but it's really all about the ride. It's a huge adrenaline rush."

From showing how startup partners can quickly become family members as the business operates from the basement, to the difficulties and sleepless nights, "The Founders 2010" gives a sneak peek into the world of Internet entrepreneurship.

With only one day until the Le Web Conference, ReadWriteWeb invited editor of ReadWriteFrance Fabrice Epelboin to share his thoughts on this year's theme - the real-time web. While many choose to focus on the negative aspects of real-time technologies including information overload, Epelboin offers a positive view of how the real-time web offers French netizens an effective tool for political commentary.

In a Facebook post marking the 20th anniversary of the fall of the Berlin Wall, French President Nicolas Sarkozy claimed that he'd taken part in the event at Checkpoint Charlie on November 9, 1989. Nevertheless, according to Epelboin, after some fact checking, journalists discovered that the date of the event was unlikely to be true.

In protest to what appears to be Sarkozy's effort to rewrite history, bloggers across the country got creative. Nicknamed, "Sarko on the Moon", real-time netizens tweeted their best rendition of the President Photoshopped into historic scenes.

While a fun exercise in citizen-driven political satire, the campaign renewed criticism of Sarkozy. Many netizens have openly railed against the President for his aggressive enforcement methods. Most noticeably, Sarkozy enacted the internet policing agency HADOPI, an organization authorized to monitor innocent citizens for illegal downloading.

After successfully selling MyBlogLog to Yahoo, it was surprising to see Lookery founder Scott Rafer write a blog post announcing his company's "orderly shutdown". In heartbreaking detail he took full responsibility for the company's demise saying, "In chronological order, the sins Lookery committed under my leadership were continuing our dependency on a large partner, not knowing when to cut bait on a failing asset, and building ahead of the market." While Rafer is still advising half a dozen startups and API management company Mashery continues to thrive, the loss of Lookery has taught the entrepreneur some hard lessons.

"It's important for a company to exist at all," said Rafer, "But once you've gained some traction you should work to reduce your dependencies." With Lookery, Rafer's company was completely dependent on working within the Facebook ecosystem. Said Rafer, "I've ranted for years about how bad an idea it is for startups to be mobile-carrier dependent. In retrospect, there is no difference between Verizon Wireless and Facebook in this context."

After realizing that Facebook would not release anonymized data in a timely fashion, the CEO changed the scope of development. The team first began cloning the Facebook targeting system and then sold the network to build out Lookery's universal cookie mechanism. Rafer admits that this second project was created well before the market demanded it. Since announcing plans to close down Lookery, the entrepreneur offers sage advice to others.

Lessons Learned: Advice to Others

1. Ramen Profitable: Rafer maintains his belief in the "ramen profitable" model of business. He says, "If you can, bootstrap for as long as possible. You need to build something solid and meet those needs first. Then try to postpone fundraising until you've got scaling issues, not survival issues."

2. Understand Expectations: As a precaution for those who do take on funding, Scott Rafer explains, "You need to know what you owe your investors. If you've already built on one platform, do you owe it to them to build elsewhere? Know their expectations before you take their money."

3. Gain Control: Rafer believes that one way companies with largely Facebook-based audiences can mitigate risk, is to utilize Facebook Connect. This way they can gain access to at least a portion of users in the event of a devastating platform change or alteration to the terms of service. Says Rafer, " Basically you need to exist first and then think about how you're going to get out from under the thumb of a single entity."

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

You did it all: you built a valuable venture and sold it. The contract was signed... finally! The wire transfer came through. You are wealthy. Congratulations! So, what's next?

Why even think about that ahead of time? Two reasons. First, if you think about it clearly now, you will be better positioned to know what you want when you negotiate your exit. Secondly, many people go a bit "off the rails" when they finally get to relax after years of hard venture-building. This post assumes you had a big payday; if the exit was just enough for you to pay off some debts, you'll probably be back at work on Monday -- not much else to consider.

5 Tips for the Recently Cashed-In

Take at least three months fully and completely off. Really switch off all electronic devices. Reconnect with friends and family. Do whatever you love doing. Recover some of the health and fitness that your years of stress and overwork undid. Only after this sabbatical will you be able to think clearly about anything.

Don't make any high-risk investments for at least a year. You may become an angel, and that's a great thing to be: it can be fun, you can give back to the entrepreneurial community, and you may even make some money. But recently cashed-in entrepreneurs have a habit of jumping into bad deals quickly. Keep track of the deals you want, but don't hit the "Send cash" button until you are clearer about how you want to operate as an investor. Tell all the great entrepreneurs whom you want to maintain relationships with what your game plan is, so that expectations are clear.

Avoid the "Coulda, woulda, shoulda" return act. You probably had to make trade-offs in your venture because of capital constraints and/or investor pressure. Now with money and fame, you could jump back in (if the non-compete terms from your last venture permit) and show them all how it really should have been done. These often turn out to be disasters, because the motivation is unclear.

Take time to evaluate the bees in your honeypot. You are suddenly on the wealth management industry's map. A lot of folks want to help you manage that loot. Many of them are real professionals, and you will need some help. But there are also scammers and people who simply don't add any real value. Take your time.

Re-connect with a long-lost passion. This may take you completely away from business. Or it may point you to your next venture.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

There are two schools of thought about founders as CEOs. One school says that founders rarely make good CEOs: the skill sets are simply different. The founders may make more money in the end, but they need to hire professional CEOs. The poster children for this school are Sergey Brin and Larry Page as Google's founders, with Eric Schmidt as CEO. The other school says that no one has as much passion, drive, and deep market and technological understanding as the founder, and so they are best off remaining as CEO. The poster children for this school are Bill Gates and Larry Ellison. As a founder, which school of thought do you belong to? If you have a point of view, how do you make sure your point of view prevails? Above all, make sure you at least have a point of view.

Three Classic Scenarios

Two equal founders + one new CEO
This is what happened at both Yahoo and Google. (Yes, the Google story is different in most other ways, and no need to rehash Yahoo's later mistakes.) This seemed to work for them. The two founders made good money and avoided a lot of work they did not understand or enjoy. It also avoids the issue of which founder should become the boss.

Triumphant return
This has one blazing success story: the return of Steve Jobs to Apple. But other ones did not work out so well: Jerry Yang at Yahoo comes to mind.

One partner who emerges as CEO
Bill Gates emerged as the leader of Microsoft, not Paul Allen.

Which Scenario Do You Want to Play Out?

Some founders have no doubt. They fall clearly into one camp or another. They say either...

"Who wants to do all that boring stuff anyway. Let me do the creative stuff. and let someone else make money for me."

If you don't have such clarity, you will need people whom you trust and who know you well to give you an honest assessment. And you will need to do some soul-searching.

Your decision will depend on many factors, mostly personal ones. You could hire for any skill-set you are missing. You might want to re-read the early chapter "Are You Really an Entrepreneur."

It's Different When the Game Changes

Markets can change. Let's say you are a techie, and your venture was set up as a consumer website but then morphed into a B2B venture, for which sales skills are paramount. Or vice versa.

In such circumstances, you may be smart to say, "I need someone else at the helm."

Don't Let Investors Make This Decision

This is your decision. Some investors have a very firm view on this. Some fall into one school of thought or the other. However, some are agnostic, letting circumstances guide their view. Knowing their view before you sign the term sheet would be good, to make sure you both see the world in the same way.

If the VC has a strong view that founders never make good CEOs, and the founder thinks, "No way is anyone else running my business," then get ready for one big bruising fight!

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

If you have raised money from investors, you will need to sell the company at some point for them to get a financial return. It's simple: if you don't want to sell your company, then don't raise external equity capital; if you want to maintain control indefinitely, then opt to incur debt instead (and meet your debt covenants). You may find an unusual breed of equity investor who is looking for long-term dividends. But the normal deal with venture investors is to sell the company within approximately five years so that they can get a capital gain.

Four Tips to Get a Sky-High Valuation

Ever hear about those deals that have sky-high valuations at exit? How do they do that? Here are the four things you need to do:

Create competition for a critical scarce asset. The best exits come when two Goliaths fight in a market and you have that one critical strategic thing (customers, users, technology, whatever) that makes the difference. Two Goliaths are sufficient as long as they really hate each other and the market is big and the winner is undecided. Having a scarce asset means that you have already beaten the other early-stage ventures: you are the declared winner of the new kids in town.

Make sure time is on your side. If you are burning cash and your current investors are less than supportive, even the hottest negotiator will fail to get a great exit deal. You need positive cash flow from operations. That will put time on your side. If the markets crash or your sector falls out of fashion or the offers you get are not good enough, you can just hold on until the right deal comes along.

Enable potential buyers to get to know you over time. Deals don't get made overnight. The final haggling happens quickly but usually after a long courtship. And during most of the courtship, neither party explicitly talks about acquisition (yes, it is like dating). Instead you do some business together, discuss synergy and partnerships, etc. This gives the buyer's negotiator the support for the deal they need to justify a big valuation. A lot of the managers there should be saying "We need these guys."

Exit early in your hockey-stick-like growth. If you are saying, "We'll grow fast when X happens," you're leaving room for skepticism. If X is expected to come from the buyer, then your negotiating position is weak. Your metric for growth could be used as a proxy for revenue if you're in the late stage of a bull market (i.e. a bubble). But in a normal market, real revenue and even profit growth determine valuation. The good thing about selling in a down market is that expectations are lower. When flat is the new 30% growth, you will get a big premium if your growth is 50%. Why not exit later? Three reasons:

Markets can change and growth can slow,

Investors want their return sooner than later,

Buyers of early-stage ventures buy more on future expectations than past results.

What If Those Four Pieces Are Missing

If you have all those pieces in place, you will have built the perfect venture, and any competent investment banker will be able to get you a great deal.

What if only some of these pieces are in place? The result depends on how many pieces are missing. Most exits can be put into one of the following categories:

Liquidation, which is opposite to the sky-high deal (described above) on the spectrum. Your goal here is simply to pay off creditors. Investors and the management team lose everything.

Investors get their money back (through Liquidation Preference), and the founders (management team) get nothing. The consolation for the founders is that their reputations remain intact.

A reasonable return for all, which happens when you have perhaps only two out of the four pieces in place.

Sky high, when all four pieces are in place.

The One Piece You MUST Have in Place

You must have either positive cash flow or so much cash in the bank that even the most skeptical analyst believes your runway is long enough for you to lift off.

If you have neither, you had better be a superb poker player and lucky. Yes, both!

Three Things to Prepare Early

Eliminate any due diligence show-stoppers. You don't want something that you could have easily fixed early on killing the deal at the 11th hour. That something could be a litigation-related issue, the poor reputation of a team member, a corporate structure that doesn't sit well with the buyers, anything. A good investment banker or deal specialist can help with this.

Get to know some investment bankers. Get to know the ones in your market early on; you can decide on one when you are closer to exiting. Investment bankers do the same thing themselves; expect a lengthy but low-maintenance courtship. You can get some free advice and good lunches, and you will be able to make a better call on whom to choose when the time comes.

Do some real work with potential acquirers. See point #3 in the first section above: allow potential buyers to get to know you over time.

Timing

Venture investors usually like a return within five years because this is how they plan their funds, but the range is usually more like two to seven years, and some go way beyond that. Essentially, holding on longer is much better if you can reasonably expect your venture and/or the market to improve.

Don't set an exit date. Your venture's momentum will determine the timing.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

When you first start out, you will find it amazing that anyone will even listen attentively to your idea. Then, someone actually investing money at all in your venture seems extraordinary. When your first revenue comes in, the validation is wonderful. What happens after that? A quick exit and off to have some fun? Perhaps, but many entrepreneurs go through a grind-it-out phase. How you approach this phase will depend on how much you enjoy it and how effective you are at it.

Grinding Out the Numbers

Re-read our chapter on how to hit your numbers.

You should still have your magic sauce with you: the amazing code, the user interface that blows people away, the big secular wave that you are riding, the value proposition that convinces even the deepest cynic to give it a try. All of these are a given. They are what got you to this stage.

But now you are at the stage of 99.9% perspiration and 0.1% inspiration. This is the grind-it-out phase. Everything has to be done right. The details really, really matter. And there are all kinds of details, many of which you find it hard to be interested in.

Back to Basics

At this point it might be worth taking another look at these chapters:

Five Tips

If you have these bases covered, the rest is all about you. Ever heard the expression "It's lonely at the top"? Now you'll see how true that is. Here are five tips to help:

Have a good board. You'll need advice from people whom you trust and who know the business.

Take time to exercise. Schedule it like anything else you do. Exercise gives you more energy and helps you deal with stress.

Delegate (or fire yourself and find a better CEO). This is not the phase of entrepreneurial startup heroics, when you have to do everything yourself. Re-read what are the only three things a CEO has to do, and do only those things.

Seek other forms of intellectual stimulation. During the grind-it-out phase, the three golden rules are focus, focus, and focus. But you have a restless intellectual energy: that is why you became an entrepreneur. Don't invent a diversification to satisfy your intellectual curiosity. Learn Sanskrit or hieroglyphics instead. The brain exercise will do you good.

Re-connect with the people whose pain you are trying to solve. There was a reason you were passionate about this when you got started. Re-connect with that passion. Oh, you were just faking that passion, were you? Then good luck with that!

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

There comes a time for every venture when the owners have to decide whether hockey-stick-like growth is feasible or not. In your initial plan, you indicated a sudden surge in revenue at a certain point in time, i.e. where the hockey stick shows up. You have now reached that point. You may have a great business, but will it hit the big time?

You need to make an honest, clear-eyed assessment at this stage. You might spend money in the hope of achieving that growth and end up losing everything, which would be a big shame if your business was profitable and growing at normal rates (and therefore valuable). On the other hand, forgoing a chance at the big time just because you are too nervous would be equally unfortunate. How do you navigate this complex decision?

Understand Your Investor's Agenda

If you go for growth and miss your numbers and have to raise more money, your investor will get hurt a bit and you will get hurt a lot. The investor can put in more money, and they will do it on harsh terms if they have to because you have missed your numbers. You may end up with nothing at the end of the day while the investor will get their money back plus some.

If you don't know how that works, look up and understand Liquidation Preference. Your contract with the VC will have a Liquidation Preference clause. It is a perfectly reasonable term (although there are egregious variants), but it can really hurt you under certain circumstances. Basically, your view of risk and your VC's view of risk are different.

Let's look at a simple case. Let's say your VC invested $3 million for a 30% equity share and has a 5% Liquidation Preference (quite reasonable -- not one of those egregious variants) and that your business sells five years later for $3.8 million. What will you and your team get? Because you and your partners and team own 70% of the shares, you would get 70% of $3.8 million, right?

Wrong. You get zip. Nada. Nothing. Just do the compound interest calculation to see why. The fact that you own 70% of the common shares means nothing in this case. The VC gets their money back with interest, which is not a good result but not a disaster either.

If your venture does reasonably well and sells for $50 million, you and your VC will do just fine. The VC will get $3.8 million, and you will divide up $46.2 million (i.e. $50 - $3.8 million) according to the ratio of shares owned. (That works out to over $30 million for you and your 70%-owning team.)

If you hit the ball out of the park and sell for $500 million, the Liquidation Preference becomes essentially a rounding error of interest only to accountants. If your venture misses its numbers and sells for $3.8 million, you will get nothing, which is quite reasonable: the VC bought into a dream and a team, and if you do not deliver, you shouldn't get anything.

Even if the whole business goes kaput without any realizable value, your venture is still just one among many companies in the VC's portfolio. VCs don't like losing ventures, but as they say, "This will hurt you a lot more than it hurts me." This is akin to the chicken and pig contributing to the eggs-and-bacon breakfast: the chicken may be involved, but the pig is "committed."

Just understand that your interests may not be aligned and that your and their views of risk may be different.

Raise More and Go for It?

Let's say you raised $3 million, and you are now gaining traction and everyone is telling you to raise more and really go for it. The VCs are ready to write a big check. It's a no-brainer, right? Wrong. This is when you need to think hard.

Suppose you raise a second round. It's a nice big one for $10 million, and the headline valuation is triple that of your first round. You and your team are giving each other high fives. Perhaps you don't look too hard at the Liquidation Preference. This time, the terms may actually be egregious, but the thought of that $10 million and the headline valuation number cause you to overlook that.

For example, Mark Zuckerberg should be a billionaire because he owns a ton of founding stock in Facebook? Well, Facebook has raised $640 million and some of it a long time ago. There would almost certainly be Liquidation Preference. If Facebook sold for around $1 billion today, Mark Zuckerberg would probably walk away with nothing but a lot of experience and memories. But Facebook would never sell for as little as that, so not to worry, right?

Entrepreneurs are optimistic by nature. They have to be if they are going to get out of bed every morning and work against the odds as passionately as they do. VCs don't have to be optimistic: their downside is pretty well covered.

Run the numbers -- all of them, not just the rosy projections -- and see where you end up. Then make sure your interests and the VC's really are aligned.

And how do you align interests? Five ways.

1. Align Around Facts

Facts are hard to come by in a startup. There is a ton of unknowns. So separate fact from forecast: you can take facts to the bank, but you run sensitivity analysis on forecasts. If that sounds intangible, here is the simple version. Take your forecast and...

Double the cost,

Halve the revenue,

Double the time it takes to do everything in the forecast.

First, do you have enough capital for this scenario?

Secondly, look at what the business would be valued at in such a scenario... not what you hope it will be valued at, but rather what other companies in a similar position are being valued at.

2. Focus on Server Costs

In the Web 2.0 era, we achieved control over the costs that bedeviled the 1.0 era:

R&D costs have shrunk through a mix of open source, new development tools and offshore resources.

Marketing costs have shrunk, thanks social media and viral marketing.

Hearing the proud claim that "Our major costs are now only our servers" has become common. For some businesses, that is no longer a proud refrain but a business problem. If you hit that magic viral moment when user traffic takes off, you had better have some of these three things:

An incredibly low cost per user as a result of some really smart performance optimization,

A revenue model that kicks in right after traffic grows,

Enough capital to sustain you until #1 or 2 is figured out.

Ideally, you would have all bases covered, but two out of three is fine. Look at Google. It had #1 and 2. Twitter and Facebook have #3. I would prefer to own Google.

Even if revenue growth is lower than forecast, if the server costs are under control and user growth is booming, you will get more VC money on good terms.

So, don't skimp on that software performance design and coding early in the game. Leaving it as an afterthought was okay for a venture starting out in 2004, not for one starting out in 2009.

3. Control the Business Planning Process

This means you will need a process. If that goes against your grain (because, say, you are a creative type, a great hacker, or a sharp sales guy), then find someone on your team who can really run the numbers and unite everyone around a common planning process.

The type of process will depend on the type of business. At a high level, they all address these questions:

Where are we now?

Where do we want to get to?

How do we get there?

As the entrepreneur/CEO, though, you need to own this process and drive it. The worst thing you could do is let a junior member do this for you. They don't truly understand your business and certainly don't care about it as much as you do, and their interests won't be the same as yours.

The process must be dynamic and based on a financial model. This means you should be able to adjust each variable and re-plan efficiently as circumstances change. Your VC may use earlier plans to beat you up a bit, but those plans are irrelevant; all that matters is the current one (and your VC knows that).

4. Talk to Your Independent Adviser

This is when you will find it valuable to have an independent adviser on your board (see Building an Advisory Board). Being independent means that the adviser was not nominated by the VC. Having someone like that on the board (as opposed to their being merely a friendly mentor) is important because they will then know the numbers and character of the VC better. When you need critical advice in a hurry, it is vital that your adviser knows these things.

5. Do a Deal That Aligns Your Interests

This is possible. If you have a good VC, a good board, and some good advisers, having an honest dialogue to get everyone's interests aligned is quite easy. If you have a lousy VC and a toxic board, you will have a nasty fight on your hands. Don't shirk that fight.

The simplest way to align interests is for the VC to buy some stock from you and your founding team. But the right amount: not so much that they will be afraid (justifiably) that you will walk away to play golf or start another venture, but enough that your family feels secure and personal finances are not a worry. Too much stress is not productive. In other words, you and your VC should be in the same boat and view the world and your risk with the same perspective.

When your business finally gains traction and VCs want to invest more money because they see the big pot of gold at the end of the rainbow, your negotiating position will be strong. At this stage, they need you more than you need them. But don't abuse this position of strength: just use it to get what you and your team reasonably need, and then march on together to build the big dream.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

The three steps to building an online brand are:

1. Look good,

2. Get noticed,

3. Build trust.

In the long run, only the last one matters. Enron's logo was just fine, and it got noticed, but on that last count, well...

Look Good

You need to do many things on the cheap. but there is one thing on which you should spend as much money as you can afford. Spend for it in cash if you have it. Spend for it in equity if you don't. Do it yourself if you are brilliant at it. If you are lucky enough to have a friend who is brilliant at it and will do it for free, well, good for you (but the fair thing would be to give her or him some equity).

The thing we're talking about here is logo design. Your logo will set the theme of your site's design. It will visually key off the story that you tell in words.

Yes, you can re-design it later when you have the money. But when you need to get noticed and you need those first impressions to be good ones, a great logo really does matter.

Get Noticed, Part 1: Don't Rely on PR Mechanics

When you are established, you can be a "PR mechanic" and do the basics, such as:

Send emails to bloggers,

Announce news via wire services,

Send press releases with embargoes.

Those mechanical tasks are fine when you are big and established and well known. But they are totally pointless when you are working out of your garage and no one has heard of you. You can do these things yourself -- they don't cost much time or money -- but just don't rely on them for results.

When starting out, you need to be a PR artist. You need a bit of magic to get noticed. You cannot delegate this. You or your partner have to do this because, first, you cannot afford to hire a PR person yet (at least not a good one) and, secondly, anyone who picks up on your story will want to speak to the person who was passionate enough to build the service.

You have to begin with an insanely great Web service. PR artistry won't help a poor site. Some people might take a look, but then they will ignore it just as fast.

If you have a great service, then getting noticed is very easy. You tell someone, who tells someone else, who tells someone else... That happens fast in a networked world.

Get Noticed, Part 2: Study the Networking Science of PR Artists

Magic is merely a science you don't understand yet. The magic of PR artists is understanding how networks of influence work and getting into those networks wherever they can.

If you are a serial entrepreneur and your last venture was a roaring success, simply contact a few mega-hubs of influence. They will surely listen to you and get the word out, even if your new service is rubbish (in which case, it will die after a short burst of hype).

But for you, the first-time entrepreneur, who doesn't know anyone famous, just getting anyone to listen to you is a small victory. Luckily, today you have a couple of amazing social media tools to traverse those networks of influence. The one you choose depends on your service:

Twitter for a consumer service,

LinkedIn for a business service.

Some fans may be annoyed that I left out Facebook, but there is a reason. Facebook is designed to communicate with your friends. Those friends may or may not be able to help you. If they can, that is probably a coincidence. And relying on coincidence to build a business is not good.

Twitter is the easiest way for your consumer service to get noticed because it is so open. Find experts in your area; it's not hard. Google around until you find some people who write intelligently about your market. Then find those people on Twitter; they are probably there, but if not, don't worry: plenty of other experts will be.

Following those experts does not mean that they will follow you back. But you can look at who they follow. Choose the ones who are experts in your subject, and follow them too. See what hash tags they use, and put out some tweets using the same tags. Re-tweet some of what they say; they will notice it on their wall of vanity.

If one of the people they follow mentions you, your target expert may notice. If two or three mention you, they certainly will.

This is certainly much, much easier and more effective than cold calling, cold direct-mailing, or cold emailing.

Similar techniques are possible on LinkedIn. But by the time you read this, they may be overused, ineffective, and regarded as spammy, and LinkedIn or Twitter may have put in place controls to block certain techniques.

So, as you look at the current social media world, just remember:

Everything is a network. Traverse the network until you find some entry points, and then start from there.

Everything social revolves around conversations, and conversations often start with a story and move on to a question.

Get Noticed, Part 3: Tell a Good Story and Ask a Question

Now you have a great site and a great logo. All you need now is a great story. All three have to be in harmony. You need to be able to get that story across in:

One sentence in an email. 140 characters is as good a limitation as any.

30 seconds verbally, at any F2F event when someone is in front you. (If you are lucky enough to trap them in an elevator in a tall building, you may have plenty of time. But you will more likely be at a cocktail party after a conference and have far less time.)

One page, or five minutes, once you have the person's attention.

People have been telling stories ever since they have been hanging out in caves, and all stories tend to have these characteristics:

A beginning, middle, and end. Being a startup, you can tell only the beginning. But you are claiming to know how the middle and end will play out. You are spinning a science-fiction tale.

Protagonists, tension, good vs. evil, with good winning out in the end.

Corny? Sure. Effective? Definitely.

Whatever you do, though, don't waste a good story-telling opportunity with bland corporate-speak, PR-washed, yawn-inducing, click-away drivel. Ask any journalist or blogger friend to send you the most cringe-inducing examples of this to scare you straight. Keep the story human and real and simple.

Once you've told your story, have a question ready. That is how you engage in a conversation. The questions come at strategic points in your flow. When you have finished your 140-character, 30-second story, ask a question. Ask another question once you have finished your one-page, five-minute version.

Here is the golden rule of questions:

Questions must be open-ended.

A closed question invites a "No." You make it too easy for the person to walk away. Basically, the question should be something along the lines of:

"Well, what do you think?"

No, this won't work every time. It won't even work most of the time. You will have to kiss a lot of frogs to find your prince.

Build Trust

Once you get noticed, you will have to build trust. In the end, a brand is simply a representation of trust. You trust Red Bull to keep you awake without damaging your system too much. (Okay, maybe not. Not everyone trusts every brand.)

With a website, you are promising four things:

This is not a scam.

We will not abuse your privacy in any way at all. Period.

We will not waste your time with buggy code, clumsy user interfaces or long-winded articles that promise more than they deliver.

We will give you something either useful or entertaining (or better yet, both, which would be magic but is not imperative).

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

If you have kids, you will often hear (or use) the phrase, "That is not age-appropriate behavior." Young ventures need age-appropriate systems and processes, too. Too little process, and the venture descends into chaos. Too much process, and the venture becomes a slow-moving bureaucracy, and that is equally deadly. For example, having an accounts receivable process that was designed for a company with billions of dollars in sales is pointless when your venture is just starting out. So, how do you build age-appropriate systems and processes?

5 Tips

List all of your processes that need to be managed.

Hire senior managers who have expertise that is age-appropriate.

Understand all of the processes yourself, hands-on.

Understand the Conscious-Competent expertise matrix.

Understand the Capability Maturity model. Look at every process as a process.

List All of Your Processes That Need to Be Managed

Begin with broad categories:

Product: the process of building and improving the site.

Sales and marketing: how you make money.

Administration: finance, HR, operations.

List all of the processes that you currently do. Describe them in simple but clear terms:

What is the output or result?

Who is responsible?

How long does the process typically take?

What are your metrics for judging success and failure?

What often goes wrong?

If you know your processes, this will not take long. If you don't know them, well... you should.

Hire Senior Managers Who Have Expertise That Is Age-Appropriate

Hire for 12 months out. Look for someone who can manage what you hope the business will be in 12 months and someone who has already managed at that scale.

Why not hire someone who has experience at much larger companies? Because the processes they design for yours will tend to be too heavyweight, designed for companies with more operational depth. They will expect to be able to hire more people and spend more with vendors than your budget allows.

If you hire by A-Team rules, you will be hiring for innate smarts and energy. So, people who fit that bill may be able to drive growth well beyond what their experience qualifies them for.

Understand All of the Processes Yourself, Hands-On

Large companies like getting their senior managers to work across multiple divisions, departments, and regions so that they understand what they are managing when they move into that corner office. Swiss hotel owners make sure they have performed all of the jobs in the company, no matter how menial; they cannot effectively manage the people who change bedsheets unless they have done it themselves.

This is also how bootstrapped ventures work. The CEO/founder has to do everything at some stage, which better equips them to hire people to take over those jobs when the time comes.

That is how almost all businesses work. But venture-funded companies are different. The infusion of external capital allows you to hire quickly, before you have had hands-on experience. This is why having a balanced founding team is critical, with two to three founding partners who between them understand all of the processes hands-on.

Understand the Conscious-Competent Expertise Matrix

Use this graph to evaluate yourself, anyone who works for you, or any process you have to manage. It is a quadrant with two axes:

Competent to Incompetent on one axis

Conscious to Unconscious on the other.

Unconscious-Competent is things you do so well that you can do them in your sleep. You may code like a demon, or know how to sell ice cream to Inuit. Perhaps you can optimize AdWords better than anyone on the planet. Whatever it is, you excel at it.

The big danger with Unconscious-Competent is that the world changes, possibly devaluing your skills, without your even noticing. In 1939, Poland's cavalry was the best in the world, but that did not help them when the German tanks and dive bombers arrived.

Conscious-Incompetent is fine, too. That comes into play, for example, when you, the world's greatest coder, have to pitch to a prospective investor. You know you're lousy at it, and you know you have to learn just enough to get by and then hire someone later to do it better. Or if you're the fellow who can sell ice cream to Inuit, you know you will have to get someone to write the code for what you are selling.

Ideally, everyone on your team would be Conscious-Competent. You may be the best in world, but you still always look for ways to improve, and you acknowledge that macro-scale changes can devalue your skills.

The one area you want to avoid like the plague is Unconscious-Incompetent. This is the person who thinks they know what they're doing but really doesn't.

Understand the Capability Maturity Model

The concept of age-appropriate processes has been defined in the Capability Maturity model (CMM). The model was designed specifically for software engineering but could be applied to any process. These days, when online marketing is so data-intensive, CMM is just as applicable to marketing.

The model identifies five levels of maturity for an organization's processes:

Initial (chaotic, ad hoc, heroic): the starting point for using a new process.

Repeatable (project management, process discipline): the process is used repeatedly.

Defined (institutionalized): the process is defined or confirmed as a standard business process.

To apply this model, you have to understand the difference between mission critical and core. For example, accounts receivable is mission critical: if you don't get paid on time, you will go out of business. But it is not core, unless of course your product or service is to improve accounts receivable. Core is that one thing -- and it really can be only one thing -- that you do better than anyone else on the planet.

Any process that is mission critical to your venture should be at least at Level 2 and should, as you grow, steadily progress to Level 5.

If the process is core to your venture, you had better get it to Level 5 really fast.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

We added this chapter after reading a recent comment:

"Can you/anyone help me to find the best reading on "Building an A-Team"? I have a friend who has a problem relating to this title and can't wait for the chapter to be written.

This CEO has two partners who are more of a pair of lead bookends than contributors.

I've made recommendations, but he's too timid to call them to task or, better still, hit the eject button on them.

Hate to see him sink."

We just wrote about How to Hire an A-Team. But we did not address how to make room for A-Team-worthy players on the A-Team. If the positions are already filled with C-Team players, what do you do?

10 Tips for Firing Non-Performers

Do it fast.
Ask any seasoned entrepreneur about their biggest mistakes, and a frequent answer is something along the lines of, "I wish I had acted sooner when I knew that a key manager was not up to the job." There are many reasons why we drag this kind of thing out, and most of them are bad reasons.

Be authentic.
You can be authentic only if you understand how your own emotions play into it and if you can be genuinely sympathetic to the non-performer's situation. Are you delaying this because you feel sorry for the person? Or because you're afraid of how they or others might perceive you? Once you have control of your own feelings, you can then empathize with them and the difficulty they will go through once you fire them. But that won't stop you from doing what you need to do.

Cover your legal bases, and be financially fair and reasonable.
Your legal obligations (warnings, notices, etc.) will vary depending on the jurisdiction in which you reside and the contract (if one was signed). Stick to the letter of the law as a baseline, to protect the company. But then go beyond that to offer what you consider fair and reasonable. Ask one of your trusted managers what is fair. Ask your advisors. If the employee has done something legally or egregiously morally wrong, you can stick to the letter of the law only. In all other cases, remember that clearing space for the A-Team is a big investment in the future of your business, and that your company will be judged, internally and externally, by how well it handles this. If you don't feel you can be generous because you dithered too long (see #1) and the manager has lost a lot of money for the company as a result, just recognize who made that error: you.

Be binary.
With key managers, you have to either believe in them 100% and support them in every possible way or fire them. There should be no gray area, which would be hugely damaging to everyone. Right up until you make the decision to fire them, your position should be, "This person is A-Team material but needs a bit of help with something specific, and I will do whatever I can to help." If you are tentative, you will only make the situation worse and create morale problems for the rest of your team.

Understand why your A-Team managers need you to do this.
Everyone is in this together. Have you ever been on a rowing team and "caught a crab" (sticking your oar against the flow of water, like a destabilizing brake). That is what it's like when a weak manager messes it up for everyone else. You owe it to the others to fire this person. This may help you feel better about doing something distasteful but necessary.

Understand that the person you are firing could be an A-Team player somewhere else.
This is a bit of a feel-good factor. But there is some truth to this. They may well thrive in a different environment. Part of your fair and reasonable support (see #3) may be to help this person figure out what to do next.

Understand why the person under-performed, and make changes to ensure this type of person doesn't make it on to your A-Team again.
Firing an A-Team player because your processes are so messed up that they are not able to perform is a really bad decision. One other decision is worse, though: firing the only A-Team player on your team because that person annoys all of the C-Team players on your team. Think long and hard about this one. It does happen. The answer? Fire all of the C-Team players, and make the one A-Team player the core of your new team.

Over-communicate to the rest of your team and other stakeholders.
Firing a senior manager is always traumatic. The deed may be unavoidable, and you can make it quick, but it is still traumatic. So, you need to communicate why you are doing this, how you have thought it through, what the plan is, and anything else that would reassure the team that the ship has a calm and determined captain at the helm. But ask the other senior managers for help in making this transition, too.

Have a transition plan.
This includes planning for recruiting, training, and onboarding the replacement. But do you leave the former employee's seat empty until you can find a replacement, or do you announce the replacement the day you announce the firing? The answer depends on your circumstances, but you should be clear on what you will be doing and why.

Use this transition to make other critical changes.
Don't replace under-performers with other C-Team players. You'll just get more of the same. Instead, take this as an opportunity to change your market positioning or an internal process -- something that you have known has needed changing for a while but could not do with that C-Team player.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

In How to Be an Effective CEO, we noted three things that a CEO has to do. One of them is to hire and fire a top management team. One of the simplest rules to understand is:

Hire an A-Team and it will hire an A-Team. Hire a B-Team and it will hire a C-Team.

This is simple to understand but hard to execute.

Integrity

Here is a bit of timeless wisdom from Warren Buffet. He advises that, when hiring, look for brains, energy, and integrity. But if the people you find don't have integrity, the other two qualities will kill you.

10 Tips for Hiring an A-Team

Don't be afraid to hire people who are smarter than you.That is harder to do than to say. You need a lot of innate confidence to do this. Hiring someone for a technical competency that you lack is easy. Hiring someone who will challenge your thinking on every level and may later go on to build a business much more successful than yours is harder.

Hire athletes.They have energy, know how to endure pain to get results, and like to win.

Focus hard on building a win/win compensation plan.That is, a win for the company and a win for the employee. This is also hard to do right. Even good compensation plans get gamed, which is why Buffet's advice about integrity is so critical. Be generous... but also demanding (see #5).

Take the time you need.Hiring is your most important job. Take the time to interview a lot of candidates; cast a wide net. Spend a lot of face-to-face time with the candidates on your short list. Do real reference checks, ideally face to face. Meet their family and friends socially. As a side benefit, interviewing a ton of smart people is a great way to learn more about your market.

Be demanding.Find people who want to achieve ambitious goals, spend time setting metrics, and then hold them accountable to them.

Be honest and transparent.You cannot expect integrity from others unless you show it yourself. And you can't fake it either, not with members of an A-Team. They will be too smart for B.S.

Establish techniques and tests specific to the position.What is useful for a developer is not useful for a salesperson, and vice versa.

Get a second opinion.This second opinion could come from someone internal (another manager) or someone external (an advisor). Assume that recruiters have a vested interest in closing, so take what they say with a grain of salt.

Don't just "fill a position."That is not a meaningful milestone. It may allow you to check that box, but it will create 10 more boxes to check if you get it wrong. Don't be afraid to delay until you get the best possible person.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

First-time entrepreneurs are usually also first-time CEOs. When you look at your first business card that says CEO, don't forget that it is not necessarily telling the truth. You earn the title of CEO through your actions and your results. You still have your training wheels on.

Fortunately, there is probably more advice available on how to be an effective CEO than on almost any other subject. This chapter gives you a quick guide, but do invest the time to read the classics, particularly:

"The Effective Executive," by Peter Drucker,

"The 7 Habits of Highly Effective People," by Stephen Covey.

These are timeless classics. Their authors do not attempt to create any modern theory or expound on any particular business or market trend. The books work because they are based on observation. The authors observed effective people to find out what they did right.

The Effective Executive

Peter Drucker's "Effective Executive" was written in 1966. It is a slim tome and easy to read, even if the language is a bit dated. Drucker focuses on how to allocate time, because you can get more of almost any resource except time. His advice to find time for uninterrupted work is particularly relevant to today's multi-tasking world. He is also very clear about the need to allocate enough time for people. If you need an hour with someone, don't think you are being efficient by rushing through the meeting in 15 minutes.

CEOs allocate resources. The first resource they need to allocate is their own time.

One popular book today is "Now, Discover Your Strengths," by Marcus Buckingham. Drucker was a big proponent of accentuating a person's strengths rather than managing their weaknesses.

The 7 Habits of Highly Effective People

"The 7 Habits of Highly Effective People," first published in 1989, is a self-help book written by Stephen R. Covey. It has sold over 15 million copies. Covey observes the following habits in effective people:

Habit 1: Be proactive.
Change starts from within. Most people react to external forces. To lead effectively, you have to overcome that natural tendency.

Habit 2: Begin with the end in mind.
You cannot lead unless you know where you want to get to.

Habit 3: Put first things first.
This is similar to what Drucker recommends. You need to have a very clear view of what is important, so that you know what to spend time on. Note that this often means leaving your comfort zone by acting on tasks that you don't naturally like or feel competent in performing.

Habit 4: Think win/win.
Seek agreement and relationships that are mutually beneficial. In cases in which a win/win deal cannot be achieved, accept that agreeing on "no deal" may be the best alternative. In developing an organizational culture, be sure to reward win/win behavior among employees, and avoid inadvertently rewarding win/lose behavior.

Habit 5: Seek first to understand, then to be understood.
First seek to understand the other person, and only then try to be understood. Stephen Covey presents this habit as the most important principle of inter-personal relations. Effective listening is not simply echoing what the other person has said through the lens of your own experience. Rather, it is putting yourself in the mindset of the other person, listening empathetically for both feeling and meaning.

Habit 6: Synergize.
Through trustful communication, find ways to leverage individual differences to create a whole that is greater than the sum of its parts. Through mutual trust and understanding, people can often solve conflicts and find better solutions than would have been obtained through either person's own solution.

Habit 7: Sharpen the saw.
Take time out from production to build production capacity through personal renewal of the physical, mental, social/emotional, and spiritual dimensions. Maintain a balance among these dimensions.

Three Things a CEO Has to Do Well

This is all you need to do as a CEO:

Set direction and milestones (resisting the tempting distraction of juicy diversification). The ability to clearly say, "No, we are not doing that," is very important.

Hire and fire the top team (we have devoted a separate chapter to hiring an A-Team because this is much harder to say than do).

Making the Transition from Entrepreneur to CEO

Your average entrepreneur would probably say, "Yeah, right!" if told that they have to do only three things. The reality of a startup is that you usually have to do a bit of everything. You have to be product manager, if not the actual coder and designer. You become the chief marketing officer, chief financial officer, chief of just about anything that needs to get done.

This, of course, is unsustainable. You have to work out a transition plan that allows you to hire people to take over all the jobs that you currently do except the three CEO jobs.

Here are five tips for managing that transition:

Record how much time you spend on these tasks. Understand the process. You cannot hire for, outsource, or automate a task unless you understand it yourself. Look at this "chief of everything" phase as your chance to learn.

Recognize the reality that you are not an expert in these tasks. So K.I.S.S.

Understand the difference between "core" and "context" in your business. Core is what you have to do really well and do in-house. Everything else you can and should outsource.

Hire, outsource, and automate in proportion to the growth of your business. If you can manage five clients with everything else you are doing, and your two-year plan calls for 20 clients, hire someone who knows how to win and manage 20 clients (not someone who managed 1,000 clients at their last job). When you finally get the resources, there is a huge temptation to over-engineer.

Pay particular attention to hiring someone to do the one job that you love and could continue doing very competently (whether that is coding, design, marketing, sales, or finance). Holding on to this one job, your comfort zone, is hugely tempting. But it is a huge mistake that will prevent you from becoming an effective CEO.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

"It ain't over till the fat lady sings" means that nothing happens until you get the signature on the contract. That is when the money gets wired. Deals often get derailed. They drift, and then nothing happens. Or a competitor comes in and snatches the prize from you. That is why a "closer," someone who can seal the deal, is so prized.

For enterprise systems, closing is a core competency. For Web ventures, you may need the skill less. But when you do need it (to raise money or win over a big strategic partner), you really need it. And you cannot delegate negotiating and closing. You can get advisors, but as the entrepreneur/CEO, you have to make the big calls. So, in this chapter we aim to distill a few libraries' worth of books on negotiating and closing into a few points for the busy entrepreneur.

Four Points on Negotiation and Closing

Two ears, one mouth,

Wait until you hear them scream,

Use tension to your advantage,

Imagine the press conference.

Deals are deals. The deal could be securing an enterprise-wide contract for your software, raising a Series A VC round, selling your venture, or doing a big partnership deal. We tend to use the language of "buyer" and "seller" when discussing these four points, but they can apply to any kind of deal.

Two Ears, One Mouth

This is the simplest and most important sales lesson: listen. It also means keep quiet. No golden oratory, no gift of the gab, no persuasive speeches. Just listen to what the customer wants and let them reveal their needs and negotiating position. Then work out how to present what you have to meet those needs. Or decide that they are not the one to focus on and move on to a better a prospect.

Silence is very awkward socially. We are all brought up to fill these awkward moments with some type of conversation. Good negotiators use silence to great advantage.

Let's say you have just proposed a valuation to your investor. The investor looks at you with a blank stare. Time ticks by and you think the deal has gone south. You start to think, "Oh no, we blew it and started too high." More time ticks by. You could stammer something about it "all being negotiable, of course" or just keep silent and wait for him to say something. It is, after all, his turn to speak, and he will probably say something.

When someone agrees with you, shut up. When the contract is about to be signed, shut up, or talk about the weather. You can derail a good deal by raising more issues than need to be raised.

It is a simple mantra: you have two ears and only one mouth. Use them accordingly. If in doubt, shut up!

Wait Until You Hear Them Scream

When I managed a six-person sales team selling financial trading systems on Wall Street, there was one guy who was consistently the best performer. He was also, by all other visible metrics, the worst salesperson. His presentations were rambling and verged on incoherent. His writing style would have given my old English teacher apoplexy. He was consistently abrupt, almost rude, to all concerned. He came in late, left early, and took long, expensive lunches.

I was really interested to find out what he was doing right. I do not believe that luck is a consistent reason for success. He must have been doing something really, really well, because everything visible he was doing was being done very badly.

I discovered that the thing he was doing right was qualifying his prospects with great care and discipline. We all know we should do that, but very few salespeople do it well at all. We think sales is all about hard work, persistence, determination, and all those other good Protestant work ethics. So, we drive relentlessly on, calling each prospect for the umpteenth time.

This guy on my team waited until he could see that a customer's need was real and urgent. He waited till he could hear them scream. He then looked for an indicator that we had an edge in the deal, some unfair advantage.

His laziness was a bit of an act. In reality, he was a tireless networker. That is what all those long, expensive lunches were about. However, he worked to create a sense of equality among, and respect for, his customers. Salespeople are usually all too ready to get on their knees for that all-powerful buyer or investor with the big budget or fund. The buyer won't respect that salesperson and will ignore five of their calls, assured he will find another seller.

Yes, it is a bit of a power game. The game is easy to play if you work for its most powerful player. But it is hardest to play when times are tough and you are behind in your revenue targets, or when your venture is running out of cash.

One way of checking for urgency is to see how much effort the prospect is putting into your relationship. You have to be able to see some equality of effort. Calling five times before the prospect returns your call is not equality. If you send reams of information and give multiple presentations, but the prospect won't fill in a detailed requirements questionnaire, that is not equality of effort. With every call, you want the prospect to do something. If this does not happen, then they are not screaming loud enough, and you should move on to your next opportunity.

Make sure you have a live one by waiting for them to scream. Make your prospect do some work before you get too excited.

Using Tension to Your Advantage

If you sell big-ticket deals, you don't need that many to reach your revenue targets. If you are getting venture capital to power your dreams, you may need to close only one deal for your venture to succeed. But these deals take a long time to close, almost never less than three months and often twelve months or more. By the time you enter the "closing zone," you and your teammates have expended a lot of time and energy, your company is relying on you to close the deal, and you are starting to think about what you will do once the deal closes.

This is an exhilarating, scary, dangerous time. Exhilarating because you are so close to a big "high five" success. Scary because if you lose now when you can almost taste success, the disappointment will be bitter. Dangerous because a smart buyer could easily exploit your intense desire to close the deal and force major concessions out of you.

Donald Trump (the real-estate developer), in his book "The Art of the Deal," talks about guiding the other side to the point that they really want the deal and think it is in the bag. Then he backs off and demands major concessions. Smart buyers everywhere have learned some variation of this tactic.

This is when you get a knot in your stomach and may witness table-banging and raised voices. All of this unpleasant stuff is good news. Experienced deal closers recognize these as signs that a deal is closing. The absence of these signs is actually a cause for concern!

One thread running through all good negotiations is some sign of real pain from the buyer that leaves you confident you are not leaving too much money on the table. Of course, the buyer knows you will be looking for this and will send signals that you have reached their limit. The skill comes in differentiating between fake pain, as in "This is well above our budget, and my boss will kill me if I agree," and the real thing. The buyer will also be looking for the same signs from you.

Losing your temper is usually not good. It implies a lack of control and usually signals fear and weakness rather than strength. However, sometimes it can be very effective. Negotiators use many tactics to simulate table-banging without killing the deal. You can use the old good cop/bad cop routine, or the "My intransigent boss will never agree to this" line, or you could use a stalking horse to lay down a negotiating line.

Your tactic will depend on the specifics of the sale, but the one constant is that when your stomach gets in a knot, you have probably entered the closing zone, and that is good. We were engineered for fight or flight for a reason!

Imagine the Press Conference

Early on in a big complex sale, take time for a bit of day-dreaming. Imagine the press conference in which the CEO or partner of the company you are selling to announces the project to the press.

Perhaps you think day-dreaming is rather self-indulgent. Perhaps this is some variant of the old "think positive" reinforcement.

Actually, this is a very practical, strategic selling tool.

Complex sales are... well, complex. As if you were in the middle of a chess game, your brain can hurt and you may not see the forest for the trees. You are probably juggling internal politics, resource constraints, pressure from partners, competitive moves, and customer politics... and that's before you've had lunch!

You need a way to stay focused on what really matters. You need to know the single over-riding motivation of your decision-maker. This is the story your decision-maker will tell at the press conference when the deal is done. He will say why his great initiative will have a big effect on one of his company's key strategic objectives and why he was smart enough to select the one vendor that was ideal for the project.

Unless you know this story, you will be shooting in the dark.

To cut your way through the complexity of enterprise sales, you need to simplify. Select the person who is the key decision-maker. Understand what is important to him. Find the one big reason why he wants to do this project. Select the one reason why he will announce that your company is the right vendor.

In long sales cycles, take time to imagine the press conference. Use this to get clarity on the key "ones": one decision-maker, one business driver, and one vendor selection driver.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

First, the good news: building a website today is ten times cheaper and faster than it was 10 years ago. Now, the bad news: building a website today is ten times cheaper and faster than it was 10 years ago.

You are entering an incredibly crowded marketplace. You have to get and keep people's attention extremely fast, because hundreds of other services are just a click away. The bar is set very high, and knowing exactly how high does help. If you reach too low, you will only catch air and crash to the ground.

Six Milestones from 30 Seconds to 3 Years

Here is what an insanely great Web product looks like to the average user right now and through the next 3 years:

30 seconds: "I get it."

3 minutes: "I've used it and still get it, and it has not annoyed me yet."

The 30-Second Milestone

You can moan all you like about what attention deficit disorder has done for user engagement, but it won't help you one bit. Get over it. People don't automatically care about your product and won't invest any time to find out if they should care. This rule is as old as consumer markets. This is what those guys on Madison Avenue with their jingles and insipid ad slogans have always known. Political sound bites live in this same reality.

Does this feel fake and insubstantial to you, the engineer, schooled in solving big, hard, complex problems?

So, study this like you would any other big, hard, complex problem. Making a product or service look totally simple and obvious is a big, hard, complex problem.

In 30 seconds, a user who comes to your website should be able to say:

"I get what they are offering."

"This might help or amuse me."

"I know what I have to do next."

There is a science to achieving this; it has been documented. You need to look at great examples and understand how they did it. Then you need to test and change, test and change, test and change, test and change, and then test and then change, until you go crazy!

The 3-Minute Milestone

After using your website for 3 minutes, the user should be able to say:

"I still understand what they are offering, and it does help or amuse me."

"This has not annoyed me yet."

"This could be even more fun or useful than I thought."

"I know what to do next to find out if this could be even more fun or useful."

The 3-Day Milestone

Now is the time to worry about stuff like performance and reliability. If you get to the 3-week milestone and bomb, your fanatical users will cut you some slack. But at this stage? Zero slack.

Have you been planning for this milestone since the design stage? Are you running on a cloud service with auto-scaling and recovery? No. Whoops! You had better hope your product is not insanely great, but rather just reasonably good and will grow steadily. Hint: build on a cloud service (like Amazon AWS) from the start.

The Three Remaining Milestones

3-week milestone
You'll know you have hit this when VCs return your calls and VCs you have never heard of call you out of the blue. Close fast to leverage your hotness. Don't get all arrogant and believe you can do it alone. With this kind of traction, you can raise capital cheaply (and thus have less dilution), so do it.

3-month milestone
If you reach this stage, you can skip ahead to the chapter on "How to Scale Without Losing Your Shirt."

3-year milestone
If you reach this stage, skip ahead to the chapter on "Planning Your Exit."

Concept vs. Execution

We have reached the point that almost any website can be built quickly and cheaply. Money to scale awaits only for sites that actually gain traction. Management teams take care of the basics when you have traction and money. So, in the age-old debate about which is more important, concept or execution, concept is currently winning. You have to have something that meets a real need or is addictively fun.

The area where concept and execution intersect is usability. A concept that does not grab users within 30 seconds and move them through those other milestones is totally useless. Basecamp is all about usability. Twitter is about usability. Gmail is about usability. The concept in each case is simple.

New Concept vs. Doesn't Suck vs. Fast Follower vs. Niche

Your website falls into one of four categories:

New concept
If you fall into this category, your product or service type does not have a name yet. It has no market space, category, or even articulated need yet. In a decade, the number of these concepts that actually gain traction is tiny. The number of them that get through the early-adopter phase to the mainstream (i.e. reach the 3-year milestone) is even smaller. In other words, good luck!

Doesn't Suck
This one is easier. This is a service you can describe as "[something] that doesn't suck." Google first offered "search that doesn't suck," and then followed it up with Gmail, which is "email that doesn't suck." In other words, don't be afraid to go after mature markets in which the current services are not that good. Spend a couple of days browsing online and you will see plenty of such opportunities.

Fast Follower
This applies to a new concept that makes your jaw drop and you think "OMG, this is so cool." And then you realize that doing something similar would actually be pretty simple. The first one to market with a new concept is not always the winner. It just looks that way because the originator gets lost in the dustbin of history when the better venture out-executes it. You need access to capital to do this right, because you have to move fast, which means hiring an A-Team. And A-Teams like to be paid a lot.

Niche
There are thousands of these. Your niche might be geographic or a user type. Most niches are limited in scale and so do not require much capital. These are ripe for bootstrapping. But don't think niches are easy. Users will still be very demanding.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

This is possibly the most important strategic decision one can make for a Web tech venture. It is almost always a trade-off. There are those few magic ventures whose revenue scales from day one, without the need for external capital. We all want those, but they are almost as rare as hen's teeth. In most cases, you face a choice between scale and early profitability. You need total clarity on this decision, because it will determine your capital-raising strategy and all of your execution plans.

The Old Mantra: Get to Positive Cash Flow, Fast

Most traditional business people, when looking at a business plan, will ask, "How soon can the venture get to positive cash flow?" It is the critical business issue. It determines how much capital you will need and the overall risk of the business. You answer the question by looking at three factors very carefully:

How fast will revenue grow?

What are the gross margins?

How much operational overhead do you need to grow revenue at that level?

Any business can be reduced to these three fundamental factors.

Service-based businesses can get to positive cash flow very quickly, which is why they can be bootstrapped. Service-based businesses are also tough to scale because growth depends on people, and gross margins are usually not that good. So, the reason they usually have to be bootstrapped is that most venture investors won't touch them.

The VC Mantra: Scale First

At the other end of the extreme is a business like Facebook, which, at the time of this writing, has 300 million users but is still losing money. Twitter is another, with phenomenal growth and mind share but not a dime of revenue.

To a traditional business person, that sounds crazy. But when scale is your primary competitive advantage, it makes perfect sense. Think of Skype. You can replicate the technology relatively easily, but getting millions of Skype users to switch is hard. This is even truer for Twitter and Facebook, whose technology is very simple to replicate.

Scale Without a Revenue Model?

Scale first, monetize later is a reasonable strategy for certain types of Web ventures and for entrepreneurs who are well connected to sources of capital.

But to scale without even knowing what your revenue model will be? That is riskier. It might make sense in some cases. We will know that about Twitter once it finally reveals its revenue model.

For the vast majority of entrepreneurs and investors, though, scaling without a revenue model is too risky. It depends on being able to sell to an acquirer who will figure out a revenue model.

The Option That Gets You Financed

Practically speaking, most first-time entrepreneurs have little reason to conceive a venture that requires a lot of capital or a long ramp-up time to revenue and positive cash flow. There are exceptions to this rule, of course. But the normal route is for entrepreneurs to "earn their stripes" with a capital-efficient, low-risk venture that gets to positive cash flow quickly. If it works out well and they want to start another venture, they can shoot for something more ambitious then.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Fear of VCs is a common problem for first time entrepreneurs. It is a natural fear. You are going to be negotiating with somebody who is older, richer, and way more experienced in this than you are. You have heard a bunch of horror stories. They have the one thing you need to turn your dream into reality.

But chill out. Read this eight-step guide, and keep going.

Note: the term "VC" is used here to include the professional angel investors who do this for a living. They may just invest their own money, but they are in the venture investing business. This does not apply to friends and family who loan you money because they like and trust you.

Our Eight-Step Guide

1. Eliminate bad eggs early.
The vast majority of VCs are decent human beings and really want entrepreneurs to be successful. Their first duty, of course, is to their investors (and so your interests may not always align), but within that limitation they tend to be reasonable negotiators. But bad ones are out there. Eliminate them early. Check out The Funded. Ask your advisor (see step 3).

2. Understand term sheet fundamentals.
You'll need a good business advisor, and you'll need a lawyer for a final check, but you also need to understand the fundamentals yourself. Don't let yourself be confused by a lawyer because you don't know what "liquidation preference," "right of first refusal," or "drag along/tag along" means. Check out websites such as Venture Hacks. Don't waste your business advisor's time asking them to explain the basics.

3. Get a good business advisor.
You'll need an experienced entrepreneur who can help you decide what is critical (a deal-stopper) and what you can concede. Some lawyers will wade too deep into the legalese weeds and fight on points out of professional pride. You'll need someone to help you make the big judgment calls.

4. Be proactive in your reference checks.
This comes after the term sheet has been signed but before the contract. VCs do reference checks on you, and you should do the same to them. Don't worry, they won't be insulted... unless they are bad eggs that slipped through your first filter, in which case this is a great place to catch them. By being proactive, we mean selecting three companies in their portfolio to connect with. You could ask the VC for an introduction, but use your own network to connect as well.

5. Be reasonable.
If a VC sees dig-in-your-heels posturing on minor issues, they will either walk away or show you who really is the experienced negotiator with clout at the table. If you and your business advisor think an issue is a deal-stopper, calmly tell the VC why you think so. The VC would almost certainly have seen this issue before and would likely have a workaround.

6. Think clearly about valuation and dilution.
Few subjects upset entrepreneurs more than valuation and dilution. Getting some perspective on these issues and having a framework for your ongoing discussions with investors is useful. Dilution matters, and the sad reality is that entrepreneurs often end up with only a very small percentage of their company at the time of exit.

So, look at what would happen after multiple rounds of investment. Be very clear about the trade-off between scale and early profitability. Going for scale first and delaying profitability is right for some ventures; scale and the network effect are the best barriers you can erect to prevent other companies from entering the market and gaining competitive advantage. But this does put investors in control. The headline valuation number matters much less than some of the term's details, specifically the liquidation preference.

7. Make sure they have some competition.
Even the most wonderful VCs get greedy when they see a combination of awesome venture and naive entrepreneur. That is pretty rare, but if your venture gets them all excited, make sure at least three other potential buyers/investors are interested, too. VCs are like London buses: you wait and wait, and then a bunch of them come all at once.

You are either hot or not; there is no such thing as lukewarm interest. But avoid the "shopping around" posturing: you know, leaving "VC trails" in your presentation, dropping names and cards like a Victorian lady drops her hanky. Experienced VCs see through this in a heartbeat, and you'll be dead. If other investors are interested in you, their network will tell them so.

If you don't have a good VC alternative, you should know what is referred to in negotiation theory as BATNA (the Best Alternative To a Negotiated Agreement, or the course of action one party will take if current negotiations fail and an agreement cannot be reached). In simpler terms, have a viable Plan B.

8. Stay cool.
He who loses his temper first has lost. It is an old and true maxim. Very, very occasionally, a tactical bit of table-thumping will help. But getting all red in the face and looking as if you don't know whether to cry or yell won't do you any wonders.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

There are many books and countless blog posts about pitching (to both customers and investors). All we can hope to do here is, (1) put the pitch into some perspective, and (2) abstract the few key things that will help you when you are on stage. Most entrepreneurs are passionate about a particular market or technology, and putting a sales hat on does not come naturally to them. That is okay. Substance matters way more. But you can ruin a great opportunity if you mess up your pitch.

Keeping It In Perspective

The pitch is one part of a process that starts with getting a good introduction and ends with negotiation, due diligence, and closing. You can blow a good start with a bad pitch, but you can also recover from a bad pitch. So chill out.

Substance matters way more than presentation skills. A terribly presented pitch that begins with, "Traffic grew by 500% last month, and we got our first revenue last week," should do just fine. Hype doesn't help. But if you have substance, don't worry.

Take a deep breath and relax. This is still a conversation, and they are human beings just like you.

You don't have two ears and one mouth for nothing. Listen. It is the key to selling anything.

Respond carefully to questions. Take time to think of a response. Don't be afraid to say, "I don't know." It's better than BS'ing.

Allow enough time for dialogue. Welcome it early on. Learn how to take a question, respond, and then bring the conversation back into your flow. Your mantra is, Relaxed but in control.

Really, really know your numbers. Whatever they are. The numbers you should know will depend on the stage of your venture: market numbers, traffic numbers, financial numbers. Have these at the tip of your tongue, and be ready to dive into any level of detail. Business runs on numbers, not concepts.

A demo is not a pitch. Repeat, a demo is not a pitch. You may or may not need a demo, but just don't rely on it alone.

Ask for feedback in the meeting. A "No" at the meeting is better than silence for weeks after. Be persistent, as in: "Really now, what do you think?" At best, you get a chance to address a concern while still face to face. At worst, you get a chance to fix a weak point before your next pitch or just write the VC off as an ignorant twit who doesn't really get it.

Have an end goal for the meeting. Is it another meeting? Who would it be with, and for what objective?

The Slideshow. Aargh! Kawasaki Rules

You will probably need a slideshow presentation. Maybe you can do something better with screencasts or video, but investors still prefer "the deck." Everybody really hates them, though, both entrepreneurs and investors. So, just try to do as little damage as possible. Guy Kawasaki's 10/20/30 rule for slideshows is still the best:

10 slides,

Deliver it in 20 minutes,

In a font no smaller than 30 points.

The 10 topics that a venture capitalist cares about are:

The problem,

Your solution,

Business model,

Underlying magic/technology,

Marketing and sales,

Competition,

Team,

Projections and milestones,

Status and timeline,

Summary and call to action.

Twenty minutes give you plenty of time for questions and discussion. Tell them your presentation will be 20 minutes so that they know to keep their questions for later. Your job is to sell, not educate.

Thirty-point font size? Older people have weaker eyesight -- but tend to have more money, and money is what you are after, right?

You know those really cool-looking slides at conferences with cool pictures and the occasional word? Those work great for good presenters. But investors circulate your deck among colleagues and their networks. So, it has to speak to a wider audience than the one you are pitching to directly in the meeting.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

The amount of capital you will need depends on what kind of venture you plan to build. You may need to go no further than the first rung of the ladder. You might be able to build a very good business that meets all of your financial needs without raising a dime from anybody. You might also strike it lucky and get phenomenal growth without needing capital. But being under-capitalized is a big source of venture failure. So you need to assess how much capital you'll need. Your chances of realistically getting that capital should factor into your planning. If you can reach only the lower rungs of the ladder, don't plan a business that needs higher levels out of your reach. If your first venture is a success, the other steps on the ladder will be more easily accessible if you decide to pursue another venture.

10 Steps on the Ladder

You may need only a few of these steps. This is not meant to be a "do this, then do this, and then do this" progression. You can skip steps and stop at any point.

No cash, moonlighting, sweat

Credit card or savings (personal round)

Friends and family round

Incubators

Serious angels and small VCs

Classic VCs

Corporate VCs

Non-recourse working capital bank loans

IPO

Exit: Capital Realization

Our aim with this chapter is to help you understand what these investors want. Habit #5 in Steven Covey's "7 Habits of Highly Successful People" is:

Seek first to understand. Then to be understood.

1. No Cash, Moonlighting, Sweat

This is the earliest possible phase, when all you need is to build a website that can be uploaded to your server and that demonstrates your idea. If you are a non-technical entrepreneur, this step is not feasible. The non-techie equivalent would be a business concept: identifying a big gap in the market, doing enough research to be credible, and developing a unique approach to filling this gap.

2. Credit Card or Savings (Personal Round)

Now you need to load your site onto a production server (or create a fancy slideshow) and buy business cards. Maybe your phone bill just went up, or you need to travel somewhere to meet someone. No problem; no need to ask anyone for money. Just keep track of these little items. They are pre-operating expenses. If you get to profitability without external investors, these loans of yours to the company can be re-paid. If you raise external capital, this is almost always regarded as sweat equity (meaning you don't get it back until exit time, when you sell your equity).

Be careful. Loading up on credit card debt is risky. You almost always need more money than you think, and it takes longer than you think to raise real money. You can rack up a sizable debt fairly quickly. If your credit card company tightens up, you'll have no options. If your venture fails, you'll be left with a nasty bill, probably with crippling interest rates.

3. Friends and Family Round

You are now at the stage where this venture of yours might really take off. But now you need more than you can afford but less than is sensible to ask from an angel. This is the friends and family round, people who "invest" because they know you, like you, and trust you. Don't take this as validation of your venture. It is purely validation of how they feel about you.

Keep the deal simple. This has to be convertible debt. That means:

They loan the money to your business,

It converts into equity at the first equity round.

This lets you avoid having to ask your friends and family to valuate your venture. They are not experts, and it makes for difficult conversations with people who still like you.

Your friends and family will always be important to you... more important to you than this venture. Don't make promises you are not 100% sure about. Be totally open and transparent, and do your best. If you follow these simple rules and your venture fails, you at least won't lose your friends and family.

Document what has been agreed on, even if only with an email trail. Memories may prove faulty.

4. Incubators

The US alone has 600 technology incubators. One may be near you.

Some are little more than office space and offer no real value: don't waste your time with them. Look for ones with a track record of successfully incubating ventures. That track record means that angels and VCs look to these incubators for deal flow, meaning you will get access to capital when you need it.

Incubators should give you four things:

Cash. Not all incubators have cash to invest. Look for the ones that do. This could replace a friends and family round. They might do a convertible deal, letting the angels or VCs set the valuation. That is ideal. If they insist on a percentage for a small amount of cash, take a long hard look at their track record. Those deals of, say, 10% of the venture for $20,000 may work for some first-time entrepreneurs if the incubator can really deliver the credibility and network you need. But note that later investors make their decisions based on the merits of your venture. The incubator just gets you through the door and may coach you on what to say as you walk through. Is that worth 10%? Because $20,000 is probably not worth 10%.

Services on a deferred-payment basis. These would be from vendors (landlords, lawyers, accountants, designers, advisors, etc.) who get paid only after the venture is funded. So, these vendors are also betting on the incubator's track record.

Mentorship and championing. This should come from the person in the incubator who really believes in your venture but also challenges you at every step to make sure you are really ready to take it to the next level. Look for a mentor/champion who has been an entrepreneur. There has to be chemistry. See the chapter on Building An Advisory Board and follow those guidelines when choosing a mentor/champion in an incubator. Yes, you choose them. It is not just about them choosing you.

A network of entrepreneurs and investors they can tap into on your behalf.

Why do successful entrepreneurs put time and money into becoming incubators?:

To get in on the ground floor of a great venture and make some money.

The buzz of startup life is addictive.

To do some good, and repay the good fortune they have had.

To help the local region. Perhaps they came from here, went to Silicon Valley because it was their only option, but wished they had an incubator like them locally when they were starting out.

Good incubators are a great rung on the ladder. But choose carefully: some will only waste your time.

5. Serious Angels and Small VCs

Serious angels do what they do for a living. That is their day job. Sure, they love it and are passionate about it, but they also want to make money from investing. These serious angels are very different from the person in a full-time job who enjoys the distraction of hearing pitches and occasionally writing small checks.

The serious angels operate just like small VC firms. Some work in association with other angels so that they can provide enough funding that the company doesn't have to rely on VCs too early on. Some have raised money from other angels and in effect become small VC funds themselves. Serious angels take all of these steps because of one overriding fear:

They fear getting squeezed by a VC that invests in a later round.

As an entrepreneur, you need to be sensitive to that fear. Almost all entrepreneurs are too optimistic about their plan. They assume they can reach whatever milestone they have with less time and money than they really need. Then, when the venture runs out of money, the angel has two options:

Invest more money. At this point, they are investing in an entrepreneur who has not hit their numbers and whose credibility is questionable. So this does not feel good. The smart ones will just assume at the outset that they will have to invest way more money than you are asking for. For example, if you say, "We can get to profitability (or some other milestone) with $500,000," they will assume that something more like $1 million is needed and plan accordingly (by reserving as much of their or their partner's capital as is needed).

Get squeezed by a VC. In this case, their stake will be massively diluted. Say they invested $500,000 and got a 20% stake. Now, the venture is running out of money and needs $3 million urgently. The venture has good prospects, so VCs are interested. Some VCs will extract harsh terms under these conditions. Angels obviously don't like being treated this way. The venture is a winner, and they spotted it early, so why should they be the loser in this game? Bear in mind that you, the entrepreneur, get squeezed in this situation as well, but you are in a better position than the angel because the VC needs you to continue working to build value. But basically, this is bad news all around.

You can avoid this situation in two ways:

Be more realistic in your business planning. Yes, this is hard. Planning with multiple levels of uncertainty is hard. That is why investors, who know this fact very well, usually want more time to evaluate your venture than you'd like to give them. Use the angel's experience to help you with business planning. Check your assumptions against their experience. The mechanics of a spreadsheet are simple; the mistakes always lurk in one or two main assumptions. This is why the real-world experience of your advisor, incubator champion, or angel is critical.

Work with angels who, with their partners, have enough cash to invest if you do end up needing more money than planned. Work with angels who have a strong track record and good connections with people on the next rung of the ladder: the classic VC funds. VC funds are less likely to squeeze (read, alienate) an angel who they know is a great source of ventures.

6. Classic VCs

If you are a serial entrepreneur who has already built and sold a VC-funded company, you can jump straight to this rung of the ladder. If not, don't even think about it. For Web technology ventures, classic VC funds have become a source of late-stage expansion capital. Some of those VCs are getting back in the early-stage game by one of three methods:

Establishing a separate early-stage fund. Unless the VC has different partners, this separate fund is probably little more than a name and hypothetical allocation of money.

Acting as Incubator. This works like a convertible loan and can be a great solution.

Cultivating a network of friendly angels. The idea here is that they send deals to these angels, who bring those deals back when the ventures need more money.

Be careful. Many classic VCs like to work with a few "entrepreneurs in residence" to create ventures in-house. Their interest in any of these projects may be no more than due diligence.

In short, if you don't have a good relationship with a classic VC, don't start here.

7. Corporate VCs

Higher up on the ladder are corporate VCs. They get their deal flow from classic VC funds and invest with strategic objectives. They typically look to grow the market for their core product. They may want a minority stake in a venture that they see value in acquiring later on. Corporate VCs can be great, but make sure the deal does not come with strings attached that would scare off other potential acquirers.

8. Non-Recourse Working Capital Bank Loans

This is the high-five moment for bootstrapped ventures. It means you have been profitable for a while but need working capital because of fast growth. Most banks like to fund these. The big deal about non-recourse loans is that you are not personally liable. The bank uses your company's cash flow as collateral. For entrepreneurs who have gone into personal debt to build their venture, this is a big, big milestone.

9. IPO

This is the golden ticket for a VC-backed business. Well, at least it used to be. And it may be so again. It is another rung on the capital-raising ladder. You do an IPO to raise money, at least in theory. In reality, the larger motivation is to get your stock tradable (i.e. "liquid") so that you and your investors can sell some of it.

10. Exit: Capital Realization

The final step is to realize value by selling some or all of your stock either in a trade sale or to public market investors if you have done an IPO.

If you are starting out, then yes, all of the steps above the fifth rung on the ladder may as well be on the moon. But as with anything, take it one step at a time.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Should you set up an LLC, C Corp, or S Corp. And in what state should you register? These are some of the questions we'll consider in our overview of company registration choices for your startup.

Three warning notices. The first is the obligatory IANAL (I Am Not A Lawyer) statement, with "Be sure to seek legal advice" advice tacked on, which ensures that no lawyer will sue me for bad advice. The second is that this is considered a boring subject by most engineers and entrepreneurs. If this is your instinctive reaction, note that the only thing more boring and time- and money-consuming than getting this right at the start is the nasty mess you'll find if you get it wrong. The third is that this is US-specific. We don't have the time to explore legal and tax options in other countries. However, if you are currently not based in the US, we look at the pros, cons, and constraints of setting up your company in the US versus where you live.

Turn Boring into Learning

Here is advice from Alex Iskold, an engineer and entrepreneur:

"You have to take care of legal and financial aspects of the startup, so why not turn it into a learning experience? The legal and financial aspects of your company are important and interesting, and there are a lot of new things and ideas that you will encounter that will likely impress you."

Learning these aspects also saves you legal fees. If you understand the basics and have a clear set of objectives, you end up only having to say to the lawyer, "Check this." That is way, way cheaper than asking, "What should I do?"

Breaking Down the Decision

When you have more than two options, a decision gets complex. The way to simplify is to reduce dependencies and break them down into a choice of two, with a subsequent set of additional decisions -- a decision tree, in other words:

Step 1: LLC or Inc?

Step 2: If Inc, then C Corp or S Corp?

Step 3: Which state?

Step 4: All of the other pieces of information you'll need to fill in when registering a company.

LLC or Inc?

When you see CoolSite Inc, it is usually referred to as a Corp (corporation); the "Inc" is short for Incorporated. Otherwise, you'll see CoolSite LLC, which stands for Limited Liability Corporation. So, an LLC is also a Corp. Confused already? You wouldn't be the first!

Many lawyers advise startups to go for LLC for two important reasons:

It is much simpler to administer; less paperwork. This may sound minor, until you find that you're the one doing the paperwork at the expense of real work (building your product, selling to and serving clients, etc.).

No double taxation. Profits for an Inc are taxed twice, first for the corporation, and then the dividends are taxed at the individual level. The members of an LLC (the equivalent of shareholders in an Inc) are treated by the IRS as individuals.

An LLC provides the liability protection of an Inc corporation. In plain English, if someone is owed money by your company, he or she would be able to go after the company's assets, but not the personal assets of the company's owners.

An LLC incurs one cost that an Inc does not: the annual franchise tax (about $800 annually in California). But that should be minor compared to the advantages noted above.

LLC Is Better for an Asset Sale

If you bootstrap and sell the company quickly, your buyer may want to buy your assets (the website, users, technology, etc.) rather than buy the whole company by buying all the shares. Buying the shares is more complex for the buyer. This really matters if you are selling to a big company. Managers of large companies have to follow rules, and the rules for acquiring companies are very, very lengthy. This can be a real deal-stopper. They may simply say, "Asset sale or no deal."

Here is why this matters if you have an Inc: double taxation. Say the buyer is willing to spend $1 million. If the Inc sells the assets, that money is regarded as revenue. So, if you had $100,000 in costs, then $900,000 would be taxed at the corporation level (around 35%). Then the after-tax amount would be given to shareholders (you and your partners) as dividends, and you would pay tax on the dividends (currently 15%, but historically the same rate as income tax: i.e. higher). In other words, ouch!

So, setting up an LLC makes sense, right? Not so fast. Venture investors (VC funds and most angels) need an Inc before they can invest.

For Most Investors, You Need to Be an Inc

You can get investors with an LLC, but they will need to become members, which is a bit like what common shareholders are in an Inc. You won't be able to sell "preferential shares," and you will need to sell preferential shares if you want to get venture capital. Don't worry for now what preferential shares are: we'll cover that in a later chapter.

Okay, still simple. If you plan to bootstrap with only money from friends and family, go for an LLC. If you want venture capital, set up an Inc. But what if:

You want to bootstrap for a couple of years and then raise money? Then an LLC is probably the right choice. You can convert from LLC to Inc later. It is not as easy as some people will tell you, but it can be done. By that time you will be making money and can afford a lawyer to get it done right.

You don't know whether you will be able to raise money. You can set up an Inc very fast, much faster than you can convert from LLC to Inc. So maybe you should defer incorporation until you are close to raising money.

In these gray areas, when you are not totally sure whether you will be bootstrapping or raising venture capital, the choice of Corps (C Corp or S Corp) may help.

C Corp or S Corp?

There are two types of corporations:

C Corp: This entity pays a corporate tax, and the shareholders pay income tax on the distributed profits/dividends. This is called double taxation.

S Corp: This entity does not pay a corporate tax. As in an LLC, earnings and losses are passed on to the shareholders, and then they pay personal income tax. The drawbacks (for some people) are the limits on shareholders: no more than 100 of them, they must be individual US citizens or residents, and only one class of stock is allowed.

At first glance, S Corp sounds like the ideal solution: no trade-off required. But remember that only one class of stock is allowed. That means no preferential shares and no venture investors.

So, the choice is really back to Inc versus LLC. Keeping it simple, if you aim to bootstrap with only simple debt or common equity from friends and family, go the LLC route. If you plan to raise venture capital, set up an Inc.

Which State?

The choices here are:

The state you live in,

Delaware,

Another state like Delaware that allows out-of-state shareholders to set up companies. Nevada is an alternative.

Brick and mortar startups (retailers, for example) set up in the state where the owners live and do business. For Web startups that do business nationwide and globally, location is less relevant. What matters is which states make it easier to set up and administer a company, and which states are better if you have to go to court.

Delaware is the most logical choice. If you want to explore this issue further, check out the differences between Delaware and Nevada. But most entrepreneurs are probably saying by now, "Enough already! Let me get back to the real work of building my venture."

Converting from LLC to Inc

Let's say you decide to bootstrap with only simple debt or common equity from friends and family. But a couple of years into your venture, you find that you do want VC funding after all, and a VC wants you. You will need to convert from LLC to Inc. Presumably, by then you will be a bit more established and able to hire legal help to get it done right. So the only considerations now are:

Is it possible to convert from LLC to Inc? Short answer: yes. How hard is it to do? Not very hard.

What can you do now while setting up and running your LLC to make this process simpler.

How hard really is this conversion? The answer is, it depends, and you should consult a tax professional. Converting from LLC to C Corp can usually be accomplished without triggering any income tax for the owners or the company, but issues may arise.

If the conversion keeps ownership exactly the same -- five LLC Members becoming five Inc shareholders with the same ownership percentage -- then the conversion will be quite simple. If you intend to do "a little restructuring," then you'll need to speak with a tax professional.

But these are issues to think about closer to when it happens. You cannot really plan for it now. We'll revisit this in the chapter on "Planning Your Exit."

Company Administration Basics

This list assumes your company is an Inc. An LLC is similar, but a bit simpler and with different terminology.

You can do this online for a few hundred dollars. You would be wise to have a lawyer check that nothing specific to your venture requires a change. But this is almost always an off-the-shelf job, not a custom project.

Find online firms that do this by Googling "Incorporate your business." Do a dry run, print out all the forms, and make sure you know how you will be filling in the details. You will be asked for such information as the number of shareholders, their names and addresses, and who will take jobs such as Company Secretary (you or your buddy: who is better at performing boring admin tasks?).

You will get standard forms for:

Corporate bylaws and maintaining board minutes,

Shareholder agreement.

Give these to your lawyer for a quick once-over. If you don't have a lawyer buddy who will give you a couple of hours of free time, find a lawyer who specializes in tech startups. Most will do a bit of basic work for deferred compensation.

More important are the:

Employment agreements,

Stock options plan.

Again, the forms are standard; get a lawyer to quickly review. But read Building Your Team Pre-Financing to make sure you're clear on what you want to do first.

Get an Accountant and Bookkeeper

The legal stuff is mostly a one-time deal, but finances are ongoing and require continual attention. Being attentive to these details will make money-raising and exiting a lot easier. And if you never raise money or sell the business, it will make tax preparation easier.

You'll need two types of people:

Accountant. You'll need this expensive expert once a year (like a lawyer) for an audit and tax preparation.

Bookkeeper. This lower-cost clerical person makes sure your basic income and expenses are recorded properly every month, making the accountant's job simple (and inexpensive).

What If I Am Not in the US?

Then you have two choices:

Set up your company locally. The process is different, and you will need a manual on how to do this. Many concepts are similar, but the forms, terms, and details are different.

Set up your company in the US, probably in Delaware.

So, how do you choose? Look at these parameters:

Are you based in a big country that has plenty of local customers, VCs, and angels? If so, you may want to register your company locally.

Are you based in a small country that has very few prospective customers, VCs or angels? Cross-border deals scare off most investors, certainly American ones. Check that the laws of your country allow you to own a foreign company. US companies can have foreign shareholders, so no problem on that count.

Don't even think about complex structures, with the parent company in one location and subsidiaries in other locations, unless you already have a lot of capital and can get proper advice.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

There are three ways to get a great URL. The first is with magical inspiration: that perfect and available name comes to you in the shower. The second is with a ton of money, by buying an existing domain. The third (if inspiration and money are lacking) is with the process outlined below, which may yield a workable name. These days, you start with the URL and then check that some variation of the company name is available (for registration purposes). That part is relatively easy.

Relax (But Avoid Really Horrible Ones)

URLs matter a lot less than it would seem when you are starting out. One can think of plenty of terrible names that did great and vice versa. We are now moving away from destination sites. Search engines and browser capabilities, such as Firefox's awesome bar, will help people find you.

If you are relying on a great name to build traffic... don't. Unless you have a lot of money to buy an existing domain -- and that is probably not a good use of your cash -- there are cheaper ways to build traffic.

So then, "okay" is good enough. Don't obsess over the URL. Save your obsessing for usability design. But avoid the real stinkers, the names that make people laugh at you and then ignore you. We live in a global world, too, so do check that your great URL does not mean "Your mother is a mangy dog" in Chinese, French, or whatever.

If that cut leaves you short, go back to some of the names you like and try them out with .net. In some cases .net is okay, particularly if the .com name is owned by someone small and non-competitive whom you can buy out later.

Still coming up short? Try country extensions. For example, if you want rabbit.com, try rabb.it (Italy). This is risky. It sounds clever and occasionally works, but mostly confuses people.

Once you get a viable list of three that check out, buy all three and then test, test, test. And test with as broad a community as you can get. Use Twitter, your blog, whatever connects you to your network quickly. And go outside your network.

If all three fall short of this last hurdle, start from the top: go for a run, double espresso, etc. Allow time for this. The best ideas come at the oddest times and usually when you are thinking of something else.

When you find your chosen one:

Register the trademark at uspto.gov.

Protect major country extensions, .net, .info, and other extensions that a squatter or competitor may try to take if they see you get traction.

Create a logo that works.

Ensure the company name is available. In the worst case, CoolSite.com could be run by Boring Company LLC doing business as (DBA) CoolSite.com.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

This is part of your pre-financing team-building. The term "Board" may be confusing here. This is not a Board Of Directors: that is the subject of a later chapter. Nor is it a couple of your buddies. Nor is it someone who gives you one specific bit of advice. Also, don't look at this as a brand-building exercise by throwing big names on your website. Look for people who really complement your skills, really believe in what you are doing, and, as a by-product, open doors and bring some credibility.

Set Some Good Objectives

You want people who:

you trust and who trust you,

know stuff that you don't and who know what you will need,

are excited by your vision and mission,

will be reasonably responsive to your requests for help.

Using an Advisory Board as a Promo Tool Will Backfire

Have you seen those ventures with a long list of "brand name" advisers? Are they there for show or for real? Do you think investors are convinced by them? Do you think customers or users care a hoot about them?

It just looks amateurish. It is an old, out-of-date trick that has lost all credibility.

Advisers worth getting give real time and attention to the ventures they advise. So they limit how many they work with. They don't "spray and pray."

Advisers and advisers

You may have any number of advisers -- friends and family -- who you turn to informally for advice and who expect nothing in return except your friendship. But we use Advisers here with a capital "A" to denote someone with an official, compensated relationship with the company.

How to Get the Best from Your Advisers

Don't try to "get your money's worth" by asking unnecessary questions. Wait until you really need help. Make sure you don't ask dumb questions when a simple online search for the answers would do the job. Know enough about each of your advisers to know who would most likely be able to help in a particular situation immediately. Give them reasonable notice, no "I must know today" stuff.

But when you've covered all of the above, be demanding. They took on a job and are getting paid for it. (See below.)

How Many and What Type?

Don't have too many advisers. That is an unnecessary expense in time and money. Get advisers, like anything else, in the right time. The quality of advisers you can get will grow as your venture grows, and your compensation (equity) will look more valuable.

One rule of thumb: don't have more advisers than the number of people on your management team. Two to three should be the max to start with.

Seek a balanced team. If the founders are strong in business or a particular domain of business, then seek a technically oriented adviser. Or seek somebody with domain skills in your entry market. Somebody with financial chops is always useful. You always want entrepreneurs who have gone through what you will go through.

How to Compensate

Compensate with the only currency you have: equity. Don't even think of compensating in cash until your venture is spinning off a ton of cash.

Their equity should vest over a four-year period, just like the founders'.

The price of the stock will depend on when you bring them on. If the venture is pre-financing, sell them founders' stock; i.e. at nominal value. If they come on after a round that values the business, give them options to buy at that valuation.

How much? If you get advisers at the earliest stage, offer them something in the range 1 to 2% of the company. Yes, that is a real commitment, so limiting your number of advisers and getting only really good ones who contribute is all the better advice.

Give them anti-dilution rights. For example, if they have 2%, and an investor comes in and dilutes everybody by 30%, the adviser should have the right (but not the obligation) to invest their own money at the same valuation as the investor to maintain their 2% stake.

If they come on after the first round of external financing, you'll have additional things to consider:

The adviser should be compatible with the investors and comparable in level of experience (so that the adviser can work with the investors as a peer). Having an adviser on the board of directors who is neither an entrepreneur nor an investor but who only wants the venture to succeed is a good idea. Post-financing, you won't have the same freedom of action (hint: so get them pre-financing).

Their equity options will be part of the management team's option allocation. So, they won't get the same 1 to 2% that an adviser would get pre-financing.

Transactional or Deliverables Compensation?

These are tempting but usually a bad idea, They are something along the lines of, "I'll give you X% if you get Y," Y typically being securing financing, but sometimes development or obtaining customers. Treat these people as vendors and pay them on a deferred risk basis (see Building Your Team Pre-Financing). These are short-term, tactical relationships. Advisers should represent a long-term relationship based on trust.

What About the Investor's Pre-Built Networks?

Cash is fungible. A dollar from investor A is exactly the same as a dollar from investor B. Investors don't like offering a commodity, so they stress their value as advisers and the quality of their networks. That is true; they do offer a lot more than cash, but note the following:

An adviser from the investor's network will tend to favor the investor (if there is ever a conflict),

You will get better terms if you bring your own network rather than rely on their network.

But you do pay for your adviser, so like any early team decision, don't take this one lightly. It is a defining one.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

In our 10 Things to Be Clear About Before You Start, we suggested that you decide whether to build a team of partners or fly solo. If you have decided to build a team of partners, even a small team of two, you'll need to also decide how this partnership will work. Your only currency will be equity in a company that has not been formed and a venture/Web service that is no more than a gleam in the eye.

Create a Small, Balanced Team

Here is the advice of Naval Ravikant, serial entrepreneur and angel investor. His advice is directed at other angel investors, but that is a good context in which to look at this as an entrepreneur:

"Invest in teams of two to three founders. Five is unstable, one is too hard.

The best combination is one founder who can sell and one founder who can build.

The team matters more in enterprise deals, traction matters more in consumer deals"

There is a reason why people talk about "putting the band together" and "rock stars" in this context. Solo artists can do great (think Bob Dylan), and when they get some success, they can bring in session musicians (contractors). But the history of pop music is more about the great combos: Lennon and McCartney, Simon and Garfunkel, Jagger and Richards. Those bands may have had four people in them, and the other two members in each may have been talented and driven, but it was clear who the stars were.

One Leader Might Emerge

But business is different from music. A great band like the Rolling Stones ends up becoming a corporation, but the skill-sets are different. Typically in a business, one founder emerges as the leader and CEO. Think Bill Gates rather than Paul Allen.

There are instances of two partners staying together and really building a big business together. Hewlett and Packard are great examples of this. But this is unusual because it does not fit the need of a company to have a CEO/leader who is recognized as such by employees, customers, and investors.

This is why drawing up some kind of buy/sell agreement is a good idea. You don't even need a lawyer. Download the terms from the Internet. As long as the terms are mutual, nobody will get screwed. The buy/sell agreement simply acknowledges the fact that people change: their needs and motivations change. You might be the one who wants to get out of the partnership and move on. Or you might be the one who buys your partner out. Either should be possible.

But don't get too hung up on the buy/sell agreement. Plenty of founding partners cross that bridge when they get to it. It is a bit messier doing it that way, but something can usually be worked out.

Dividing Up Something that Does Not Exist

We'll cover the basics of creating a legal entity in a later chapter. Most ventures start without being incorporated. You may have heard legendary stories of founders getting a check from an angel first and then having to set up a company and create a bank account.

If the founding team is of two people, it's pretty simple. If you have three or more, you will need to define the founders' agreement one way or another. Here are four options:

Purely verbal. "We're all buddies and understand each other, right?"

Each of you hires a lawyer and lets them hammer away at each other on your nickel. Hm, now where's that nickel?

Document what you have verbally agreed on via email exchanges, and the next time you're all together, print it out and sign it.

Download a legal template, put in the terms you have agreed on, and sign it, possibly after getting one hour of legal advice from a buddy at law school.

Somewhere between three and four partners is recommended. Even buddies can misunderstand each other. When there is nothing to fight over, there are no fights. But when it looks like the venture might take off, greed sometimes kicks in, and one founder develops a case of "selective amnesia" regarding something that was verbally agreed on. Even an email record prevents that danger.

The reason to be careful about the legal agreement between the founders is that it helps with the next stage of your startup: bringing in external investors.

Get Your Due Diligence Ducks in a Row

The earliest-stage investor will be looking at just the team and the website. That's it. If your site sucks, sorry. If one of you has a criminal record, whoops. In other words, due diligence (the step after the term sheet and before the contract and cash in bank) is simple.

There is one show-stopper you want to avoid. Anybody who has worked on the website or helped with the venture in any way should sign something that acknowledges the venture's Intellectual Property (IP). If someone comes out of the woodwork and says, "They stole that from me," most investors will be scared off.

You can and should do this even before you form a legal entity. You simply want what in the old days was called a "paper trail," and is now an "email trail," which records what was agreed on. This trail could include:

The two to three founders saying that each of them owns X amount of Newco (your to-be-established company) and assigning all of their IP related to this venture to Newco.

A buddy who writes some super code just because they're a friend confirms that they have no financial expectation and assigns all of their IP related to this venture to Newco.

Somebody who provides a service in return for equity and assigns all of their IP related to this venture to Newco.

Paying with Equity

You may not be able to pay in cash for the things you need done. So, you could agree to pay in equity. Don't do this as a percentage. Use a formula along these lines:

What cash rate would this person normally charge? Check that this is normal for the market.

Agree to pay twice that amount in equity. The doubling is to cover the risk that they never see anything.

Convert the cash into equity at the valuation of the first round.

Don't treat this person or vendor like an investor or partner. They are not. They do not know how to evaluate the venture, so don't waste your time trying. They are a vendor whose payment is being deferred. KISS.

Note: a long-term adviser is a special case that we'll deal with in the next chapter.

Vesting

This comes down to the actual term sheet with the first investor(s), which is covered in a later chapter. But this item is worth considering at the beginning. When somebody invests in a founding team, they invest in the work that the team will do in future. So they want to invest your founding shares over time.

You can haggle about vesting some founding shares from the start if you have already built a lot and gotten some traction. But this is really "at the margin." Don't obsess over it.

You also need this protection with your partners. Say you have a team of three founding partners, each with 33% of founders' stock. You don't want one of them to leave just after funding comes from another venture, or to go off to play music, or whatever. All three of you need that same protection. Build your own partner vesting schedule, typically four years, and present this to the investor(s). They will appreciate that you have thought this through and that your interests are aligned.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Surfing sure sounds like more fun than work, but when you catch a technology or market wave just right, it seems almost as good.

But you need the right-sized wave:

A tsunami is only for the really bold and well-funded entrepreneur! These are the really, really, really big waves that take decades to roll out. Think Internet, alternative energy, and personalized medicine. If you catch it too early, you'll probably get washed up by the waves that follow. If you catch it too late, you'll be one of about 10 million wannabes. One or two people catch it early and surf it all the way to the end: think Bill Gates with the PC tsunami and Jeff Bezos with the Internet tsunami. But they are the exceptions that prove the rule.

A wave is ideal. Waves appear within tsunamis. Within the Internet tsunami, think social networking, SaaS, blogging, online video, paid search, and so on and so on.

A ripple is hyped as a wave but peters out before it becomes one.

Distinguishing the early stage of a wave from that of a ripple is very hard. There is no magic formula to doing this right. If it were easy, then everybody would get it right and there would be no opportunity.

So, the only way to distinguish ripples from waves is to use the wisdom of Pooh Bear...

The Pooh Corner Debates

If you have never read a Winnie the Pooh book (ahem), skip this section because it won't mean a lot to you.

Every debate about a new wave or ripple features the following characters:

Tigger, the bouncing, ever-excitable tiger, who thinks everything new is simply marvelous and exciting.

Eeyore, the old gray donkey, who thinks that Tigger, constantly running around and getting excited about new technology, is just, well, ridiculous.

Piglet, who is scared of anything new and big.

Rabbit, who does not mind anything as long as he can organize it.

Pooh, the self-described "Bear Of Very Little Brain."

The Wisdom of Pooh is to just humbly ask questions.

Most entrepreneurs are Tiggers. You need that energy and enthusiasm to start a venture. But being more like Pooh and even listening to Eeyore on occasion is useful. They are smart, and you will encounter a lot of them in the market, so you need to understand how they think. And sometimes Eeyore is right and will save you the embarrassment of plunking your surfboard on a ripple!

Rabbit is no good in the conceptual phase, but you will really need him when you reach the grind-it-out execution phase.

As for poor little Piglet, just be his friend, all right?

Take the Time to Listen to Odd Messengers

Around 1992, I recall speaking to a rather eccentric network engineer who was getting all excited about this "Internet" thing. I was not ready to listen because I considered him a bit, shall we say, flaky. And of course, I was super-busy and the Internet was a distraction.

The next big undiscovered wave is right in front of your nose, right now. Do you see it?

There are two remedies for this:

Don't work so hard all the time that you cannot recognize the next big opportunity when it walks through your door. A wise man who ran a big operation would tell his managers to take more time off work to avoid this problem. There are times when you have to sprint, to give it absolutely everything you've got. But you cannot sprint all the time.

Try to separate the message from the messenger. This requires cultivating good listening skills, which takes time and effort. But also very useful is operating on the assumption that everybody has something interesting to say; you just need to guide the conversation until you find it.

Can You Create Your Own Wave?

No. It's a tempting thought. The old Valley wisdom is, "You forecast the future by inventing it." But nobody invents waves. They exist independent of any venture. You can only invent a product or service that rides a wave. For example, you can invent a better way to deliver online video, but you cannot invent the online video wave itself.

Timing Is Everything

Timing is everything. You need to catch the right wave at the right time and know when to get off.

In the summer of 2001, I was sitting in Silicon Valley with three entrepreneurs, all originally from India. All of them spotted the Internet tsunami and had started ventures in response to it. The results were very different. Timing was the factor that separated the one winner from the other two.

The first guy started a company, got capital, and launched a product just as demand was falling off a cliff. The venture folded. He desperately searched for other work, was running out of savings, and was planning to return to India, where the joke was that B2C meant "Back to Chennai" and B2B meant "Back to Bangalore."

The second guy did all the same things but caught the wave a bit earlier and sold his venture for stock to a company that then went public. He saw the paper value of his stock turn into fortunes. However, the lock-up period prevented him from selling. By the time he was able to sell, the bubble had burst, and he got only a few hundred thousand dollars in cash. But he was older, wiser, and ready to jump back in the game.

The third guy got it totally right. He sold out in time to get a few million dollars off the table. We were sitting in his beautiful home in one of the best areas of San Francisco. He was spending a lot of quality time with his young family.

The third guy was the first to tell us that luck made all the difference. He was too modest. There is such a thing as smart luck. The lucky bit is being in the right place at the right time. Seeing the Internet tsunami early on does little good if you live in Ulan Bator, Mongolia. Nor does being in Silicon Valley do much good if the bubble is bursting. You need both the right place and the right time.

Which is why you need to understand the difference between secular and cyclical trends.

The next post/chapter is about cyclical trends, which are very different from secular trends. But confusing them is easy to do.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

This was a hard chapter to write. It feels like a chapter that would work better in the final book. You have to have a mission and strategy and plan, right? So why does writing them feel like one of those make-work projects you have to do to keep investors happy? Come to think of it, you could outsource the production of your vision, mission, and strategy via Mechanical Turk?

Seriously though, when Lou Gerstner, one of the great business leaders of all time, took over the (at the time) highly troubled IBM, he proclaimed, "The last thing this company needs is a vision." He was right. IBM needed a cultural transformation, and he provided that, as memorably recounted in Who Says Elephants Can't Dance. Nothing is worse than those scripted vision and mission statements that sound like they came from a corporate-speak random buzzword generator.

Dig a bit deeper, though, and you'll find that vision, mission, and strategy are essential. They don't even have to be clearly articulated. They just have to be real and executable. Lou Gerstner probably did have a vision, mission, and strategy; he was just so focused on the urgency of the execution that he did not have time to articulate them.

Vision, Mission, and Strategy

Vision: "I see a world where..."

Mission: "In that world, we intend to..."

Strategy: "We will achieve this mission by..."

Finding a Real Vision Thing

There are four types of startup visions:

1. Fantasy. This is more like hallucination; it does not relate to reality. It may sound fun, but is not useful for starting a business.

2. An extrapolation of current trends. A vision is really about seeing into the future. This is not totally impossible. The trends are visible today, even if the timetable is uncertain. Moore's Law was a reasonable predictor of everyone having a PC.

Distinguishing between #1 and 2 is hard. The next chapter, "Finding the Right Wave to Ride (Secular Trends)," is designed to help you think this through. But in the end, you will have to trust your gut, which is sometimes right and sometimes wrong! Extrapolating trends can go totally wrong. So, agility is a prized trait among entrepreneurs. Startup success stories are full of entrepreneurs who start with one vision and mission and then change them when they discover the reality of the market and find that the real need is different.

3. Inspiration for your stakeholders (i.e. employees, investors, clients, partners, etc). This is really about the mission based on the vision. "Come on, folks. Charge! In this direction..." This is a polished version of the rather hazy vision and mission of the original founders.

4. Lipstick on a pig. A company stranded on the wrong side of a trend (e.g. buggy and whip manufacturers when the automobile came out; gas guzzlers and print magazines today) will often attempt to devise an inspirational vision and mission statement... because "Squeeze as much cash out while we still can" is not inspirational.

Most people can instinctively tell the difference between #3 and 4.

The idea has to be one that just won't leave you alone. Such ideas often seem totally out of sync with current reality and are dismissed as crazy. That is because in the current environment they are crazy. The idea that everybody would own a PC was crazy in the 1970s, when Microsoft was starting out. People who are driven by these ideas very often feel doubt. On all sensible levels, the idea is crazy.

Insanely Great Products

Insanely great products create their own markets. They have to key into real needs, and the products are enabled by technology changes, but the creators sidestep the whole vision, mission, and strategy thing. They just create an insanely great product and launch it, and it catches fire. In hindsight, this is labeled "genius."

Great Companies Without an Articulated Vision or Mission

There was once a highly successful entrepreneur who met with investors. His business was already a big success, highly profitable and growing like a weed. He had done it without a dime of external financing, but had taken 10 years to do it. This was no overnight success story. One of the investors asked him to describe the vision and mission that drove him in the early days. The entrepreneur replied, "I wanted to buy lunch."

He was actually not trying to be funny. He had arrived in the US without any money or connections. He was simply doing the one thing he knew how to do so that he could earn enough to live. As it happened, that one thing he knew how to do was part of a huge trend, and so he was perfectly positioned. He was also super-smart, hard-working, and tough.

There was another great entrepreneur who built a business over the course of 20 years and sold it when his market turned out to be "hot." He would joke about how smart he was 20 years ago in seeing how hot his market would become.

These entrepreneurs did have a vision and mission that guided their actions. They simply did not articulate that vision and mission because (a) they were not that way inclined, and (b) articulating a vision and mission did not serve any useful purpose.

Mission Without Strategy Is Just Bombast

Strategy: "We will achieve this mission by..."

You could fill a library with books about strategy. In the startup game, the simplest way to think about strategy is as leverage. Not debt leverage (although that may be appropriate, even if currently out of fashion). Think rather of a lever.

"Give me a big enough lever and I can move the world." -- Archimedes

Startups need a lever to compete with big entrenched companies. That lever may come from software or people or something else. The other way of thinking about the lever is by looking at what VCs call "unfair advantage." You have to be able to clearly see your unfair advantage.

Some ventures start with a clear view of their lever, but without a clear view of how to use it. They have faith that if their vision of the future is right and the lever is real, they will figure it out. Google launched a better search engine (the lever) without a view of how to use it to make money, and it is now the poster child for this approach. As with most poster children, though, its massive success eclipses the countless others who have tried the same thing (i.e. started without a clear view of how to use their lever) and failed.

Strategy – Plan = Hot Air

Building a company is like building software: it is an iterative process. Once it is all complete, then the architecture and design are clearly visible. But it did not start out that way. Nor is the progression linear. The progression from vision to mission to strategy looks clear. In reality, it is a creative process and therefore messy, chaotic, and non-linear.

However, the "planning" bit is separate. The type of people who are good at creating a vision, mission, and strategy are often not good at planning and executing them. Which is why we're keeping that for a separate chapter.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Venture capitalists (VCs) have a very simple job. All they have to do is find an entrepreneur who has already created at least one hugely successful venture and then invest in his or her next venture. Only one problem: that's like finding hen's teeth.

What that means is that, first, they have to find somebody who has had a great success. Then from among that group, they have to find the ones who want to do it all over again, rather than play golf. Finally, they have to find the one who will take VC money even if they don't need it (because if they have had that big success, they'll have a lot of money in the bank). When they finally discover that rarest of beasts, the VC will find many competitors knocking on the same door.

So, VCs Do Have to Back First-Time Entrepreneurs

At ReadWriteStart, we celebrate and serve the first-time entrepreneur. So, you may be pleased to hear that VCs do need to back first-time entrepreneurs. But you should also know that you are their second choice. They don't really want to back you. They would much prefer backing a "serial entrepreneur." An old VC line is, "We back the jockey, not the horse."

Let's be clear about what VCs mean by "serial entrepreneur." Dressing up a resume so that you look like a serial entrepreneur won't get you past the initial screening. What they mean is an entrepreneur who has raised VC money and gotten the VC a return of 10 times or more. That is the gold standard they are looking for. Everything else is second best; silver medal, if you like. Here are two serial-entrepreneur silver-medal types:

Raised VC money and exited, but with a weak return. If VCs see an entrepreneur get sideswiped by a market shift but still pull in a return, they will be willing, but careful, to give them another shot.

Bootstrapped one or more ventures without VC funding and saw small-scale success. VCs will see your grit and like it. That experience is valuable. The question that will nag you is, "Does this entrepreneur know how to scale?" This is not a minor issue. Some of the lessons you learned from bootstrapping are great: all sensible investors love capital efficiency. But some of the lessons may not be so good. In bootstrapping, you tend to trade scale for short-term cash flow. VCs obviously don't want entrepreneurs to throw money at problems. But you do need to show that you know how to scale.

The above types fall into the "Proceed with caution" category.

Do you recognize yourself in one of these types? Are you a silver-medal serial entrepreneur? If not, then maybe you're a first-time entrepreneur...

Three Types of First-Time Entrepreneur

Young, just out of college, maybe had one job with a startup. This has been the primary model in the Web 2.0 era. It usually means (a) that the entrepreneur is a developer who can build a first version and get some traction without any outside money, and (b) that the entrepreneur, being young, sees a trend that older people miss. The big debate here is when and how to bring in experienced management. VCs often like this type of entrepreneur because they have masses of energy and don't know what's not possible. Their low expectations for compensation also help build a capital-efficient venture. Some of the greatest success stories fit into this category; think Bill Gates. But for every poster child, there is a ton of failures.

A lot of middle- to senior-management experience at large companies and now wants to jump into startup land. The track record of these "transplants" is pretty awful. If you fall into this category, try working for a fairly mature startup before starting one yourself. (See the next point.)

Apprenticed with a superb entrepreneur in a really great startup. There is some branding value here: "Fred from Google/PayPal/Skype/YouTube/Salesforce [insert favorite hugely successful venture here]" sounds good. If the manager really has learned from the venture and contributed to its success (being along for the ride does not count), she or he is the best kind of first-time entrepreneur. So, it's simple then: just get in on the ground floor of the next great venture.

The Contrarian View

One investor who is low profile but has a great track record always insists on backing first-time entrepreneurs. His simple reason is, "Fire in the belly." This required him to work much harder to evaluate each venture and bring his experience to it. But it worked for him.

He points out how many really expensive second venture blowouts there are. These happen when a famous entrepreneur can do no wrong, and nobody has the guts to say, "This is crazy. Stop." Think Steve Jobs with NeXT. But then, on his third venture -- call it Apple 2.0 --- he was a phenomenal success again.

So, the best VC formula is to back the third venture, when the first was good and the second was a washout.

Understand What Worries VCs About First-Time Entrepreneurs

Understand some of the things that worry VCs and you will have a better shot at overcoming their concerns. These concerns really boil down to three:

You will not hit your numbers. Ventures live by numbers. Those numbers may be revenue or profit or page views or number of subscribers or another metric that eventually can be converted to revenue and profit. A track record with larger companies may help, particularly with ones that have a reputation for disciplined execution.

You won't listen to advice. This is particularly problematic if you are not hitting your numbers, when you might need help the most. If you have never been the CEO of a VC-funded company, you may not know how to do this well. It does not mean saying "Yessiree" to every suggestion by a VC. Nor does it mean being defensive.

You don't have that entrepreneurial gene. VCs are looking for that mix of toughness and flexibility that is the hallmark of a great entrepreneur. If they cannot see that in your track record, expect them to want to spend a lot of time getting to know you.

Understand the Trade-Off You Represent

As a first-time entrepreneur, you offer investors a trade-off. You will give them less experience than they'd want, but you will provide a lot of fire-in-the-belly tenacity, grit, and hard work. It is also likely that you will have to de-risk the venture way more than you would like before getting serious money. Investors will want to back you slowly and carefully, getting to know you and your venture before writing the big checks.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

Google the phrase "Are you an entrepreneur?" and you'll get a lot of help thinking through what should be the first question you ask before starting a new venture. Because entrepreneurs are a busy bunch, we've compiled a top 10 list right here.

Our Top 10 List

You're always looking for opportunities. This is almost the definition of an entrepreneur. Every pain point is an opportunity.

Are you prepared to work long hours, every day, for an indefinite period of time? Ahem, let's dispel illusions. Put down "The 4-Hour Workweek"; it is a myth that the author spun to sell books (so that he could work 4 hours a week).

Good Health. You cannot answer "Yes" to item #2 unless you are blessed with good health and the discipline to maintain it in tough times.

Do you have a unique service or product? Most entrepreneurs have a pocketful of ideas, many of them viable. But they suffer from the "kid in a candy store" dilemma, not knowing which to choose. The trick is choosing the one that really is a winner and having the discipline (see item #9) to ignore all the others.

Are you willing to make short-term sacrifices for long-term success? There will be long periods of time when everyone around you questions your sanity, and on all normal metrics (hours worked and stress endured vs. material rewards gained), they would be right.

Honesty and integrity. You often have to be able to work with people without the protection of legal contracts. It is the essence of moving fast, and you often simply won't be able to afford a lawyer. So, you have to work with people who have honesty and integrity. It is hard to do that unless you have honesty and integrity yourself.

You're dreaming miles ahead while focused on what you're doing right now. The entrepreneur is an odd mix: part dreamer, part brutal realist and pragmatist. You should focus first on today and, secondly, on the big picture, and ignore the rest. Today is about the immediate stuff that you have to get done to stay in business, to deliver projects to clients, to collect cash, and so on. The big picture is about looking at what the world might look like 10 years from now and then building towards that. We cannot know what will happen next week, month, or year. The medium term is totally unknown. However, many long-term trends are fairly clear, even though the timetable is unknown.

Are you self-confident? You will almost certainly be going against odds that would make most people run away.

Discipline. This relates to many of the other traits mentioned in this checklist. You will need discipline to maintain your health (item #2), so that you can work hard (item #3), so that you can focus on the one product or service you have chosen and ignore all temptations (item #4).

You're prepared to say, "I don't know, but I'll figure it out." Entrepreneurs have to be generalists. They may know one thing very, very well. But they also have to know enough about almost everything else to occasionally do those things themselves, and have the judgment to eventually hire the right people to do those things.

This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.

1. Is this your first venture?
2. Are you really an entrepreneur?
3. Does your venture involve something you understand really well?
4. Can your mother understand the value proposition?
5. Can you see the right wave?
6. What does your startup want to be when it grows up?
7. Starting a company is hard and uncertain.
8. Get a partner or fly solo?
9. Would you refuse a well-paying job to do this?
10. Can you raise appropriate financing?

1. Is This Your First Venture?

If you have already created and sold a venture, and you and your investors made lots of money, and you now have another good idea, call one of the investors over for coffee. Tell him or her about the idea, and decide how much of the company you would give them for a couple of million dollars. And skip item #2 below. But you may still find the remaining checklist valuable. Lots of second ventures fail, hubris being the primary culprit.

If your first venture was a failure, it might be worth evaluating honestly whether you want to do it again. Yes, you hear all the inspiring stories of folks who try and try again and fail many times before succeeding. You don't tend to hear the stories of those who try and try again but never succeed.

In other words, are you an entrepreneur? Really.

2. Are You Really an Entrepreneur?

A lot of checklists out there help you think about this. Our next chapter has a checklist about it. But ultimately, it is a gut check. There are two times when you need to be more than usually clear-eyed about this:

During the late stage of a boom, when it all looks so simple. It is not. If you start at this stage, you may raise money, but the next down cycle will test you severely. Are you really ready for this? Or do you think the boom cycle will last forever? See item #7 on this checklist, "Starting a company is hard and uncertain."

In hard times when you don't have a job. This forced entrepreneurship is happening right now. It sure beats pounding away at a fruitless job search. And even a failed venture looks better on your resume than a blank space. See item #9 on this checklist, "Would you refuse a well-paying job to do this?" If your honest answer is no, be clear-eyed about this. Treat this period as a learning experience and a resume-filler. You may get lucky and things take off and you get to reject the offer of that job you now want so badly. But don't count on Lady Luck; she is a fickle dame!

3. Does Your Venture Involve Something You Understand Really Well?

Can you answer any question from anybody, without notes? Do other people ask for your opinion on this subject? People talk a lot about passion. Yes, you need to care, but understanding, knowledge, and expertise carry you through the days when your passion is flagging.

4. Can Your Mother Understand the Value Proposition?

No, really. She will certainly want you to succeed, but you don't just want, "Yes, sweetheart, that sounds great. I have total confidence in you." Can she really understand it? Can she explain your venture to her friends? This test will help you avoid the bubble thinking that happens when everybody in one's network thinks that x, y, or z is the latest hot trend. Make sure you don't miss the common-sense, mainstream point of view.

5. Can You See the Right Wave?

A venture needs a wave to succeed. The odds against a startup succeeding are enormous. You need to "find the trend that is your friend," so that you can compete against entrenched incumbents. This may seem to conflict with item #3, which is all about timeless common sense. But the two can co-exist. One example of a trend is the movement from offline to online advertising. But you still have to explain to your mother how you will get attention from your audience at a low enough price and sell advertising inexpensively enough to make a profit.

There are the big monster waves. And there are the smaller waves. The big monsters are obvious: there are very few of them, and everyone is already riding them. Find the smaller waves within the bigger waves.

Can you, in 30 seconds, describe both the big and small wave you are riding?

6. What Does Your Startup Want to Be When It Grows Up?

Do you want a lifestyle business? Or a quick flip that you can sell in two years? Or do you want to build a massive public company and have your picture on the front cover of Fortune? Or perhaps something in between?

Be honest with yourself and be honest with your investors and partners.

Envision what success looks like to you. Are you working four-hour weeks, while your employees or website bring in enough to fund your fun-filled lifestyle? Have you just closed a deal to sell your venture to XYZ MegaCorp for a lot of cash and are thinking, "Thanks, suckers"? Are you the CEO addressing the board of a public company of which you are the largest shareholder, and you are facing existential threats that require tough decisions that, if executed wrong, could ruin everything you have spent a decade or more building... and loving every minute of it?

7. Starting a Company Is Hard and Uncertain

The failure rate for self-financed ventures is 90%. Do you like those odds? Venture-funded companies fail at a rate of 33%. So there is reason to celebrate VC financing. But the odds of getting VC financing are very low for first-time entrepreneurs. So, the odds starting off are really, really bad. Playing roulette in Vegas may be more lucrative.

Of the companies that make it, most have gone through stomach-churning, crazy-stressful times for much, much longer than anybody would think reasonable. Don't believe the cashed-out entrepreneur who makes it sound easy. He or she has simply forgotten!

8. Get a Partner or Fly Solo?

There is no right or wrong answer here. It depends on you and what type of entrepreneur you are. A partnership means 50/50, equal. Not 49/51. Not, "Here is 10% for making x, y, or z happen." Or do you want two partners, splitting the equity three ways?

Including a buy/sell clause in your partnership agreement is a wise precaution. People change. Their needs and motivations change. You might be the one who wants to get out of the partnership and move on. Or you might be the one who buys out your partner. Either should be possible, and the terms should be mutual.

9. Would You Refuse a Well-Paying Job to Do This?

Really? How high would the salary have to be before you say no?

10. Can You Raise Enough Financing?

The failure rate for self-financed ventures is 90% (remember item #7?). You may not need much money. "Enough" is based on what kind of startup you want to be (see item #6).

One last point: do you know at least one investor fairly well who has that kind of money and who invests in your type of venture? Or do you know somebody really, really well who knows one of those investors really, really well? If not, the odds just got a lot worse.

Determination, smarts, and hard work can beat lousy odds. But calculating your odds before you start is smart.

"Startup 101" is a serialized book about the thrills and spills of starting a Web technology venture. It will be a regular feature in our new channel ReadWriteStart, dedicated to profiling startups and entrepreneurs. Startup 101 is for first-time entrepreneurs who want to go through the whole startup life cycle - including raising money, building a valuable business, and making a lot of money by selling the venture or taking it public.

The founding entrepreneur is the hero and primary reader of this how-to guide. Most of what we say will be well known to investors and advisers who support entrepreneurs, but we hope they also find some value here.

We really hope this will be helpful to the early employees who believe in the dream and do the actual hard work of making it real. They are often the apprentice entrepreneurs, learning the game before starting their own ventures. Or they may just want to understand the overall context faced by the owners, so that they can be more effective at their jobs. Not everybody wants to be an entrepreneur or has the characteristics of an entrepreneur, a subject we'll explore in the second chapter/post, "Are You an Entrepreneur?"

This series is designed for Web technology startups. But if you are building a clean tech, bio tech, outsourcing, hardware, or other type of technology venture, we hope some of Startup 101 will be useful to you, too.

We do assume that you want to build a large and valuable business in a relatively short amount of time. That normally involves raising money. In which case, you'll need to exit -- by either selling or doing an IPO -- within a few years. Startup 101 is designed for those "shoot for the moon," high-trajectory ventures. Some of the early posts/chapters will help you decide whether this really is what you want to do. It is certainly not for everyone.

We will also explore options for building smaller, slower-growth ventures, using less money and with less of a need to seek an early exit. Our aim is to help you think through what is right for you and your venture and then to build and execute a plan that is appropriate for that decision. The third chapter/post, "What Kind of Startup Do You Want to Be?," focuses on that decision.

This won't be a dry, academic tome. Nor will it give you all the details on every subject, which you can get from specialists. We will publish links to the most valuable resources of specialists. We also hope ReadWriteStart will become a forum for specialists to publish such detailed how-to guides themselves.

Startup 101 won't give you up-to-the-minute information about trends you can use at a tactical level, either. We hope you'll get those from our regular ReadWriteStart posts.

Our aim with Startup 101, rather, is to put this all in context for the very busy entrepreneur.

This is a serialized reference book. The posts and their comments will always live here at ReadWriteStart, and we hope entrepreneurs find them via search engines when they need specific advice. It is designed as a reference work that you can dip into at the right time. Advice is only useful when it is "just in time," so treat this as a reference. Sometimes seeing the whole journey laid out is useful, and that is why we are creating a book.

We'll try as much as possible to follow the chronology of a typical venture. So, the first chapter/post is "10 Things to Be Clear About Before You Start," and the final chapter/post is "Congratulations! What's Next?" (for when you've received the wire transfer and have started celebrating the sale of your venture). But we recognize that not every venture follows the same trajectory and that yours will follow its own order.

At the end, we will publish this as a book. We aim to publish both an online and print version. We will improve the chapters based on the comments we get. We also plan to be diligent in giving thanks to all who contribute to the book. You know the ritual in printed books where the author always apologizes to those he or she has neglected to thank? In the serialized web version, those people are never forgotten; they are immortalized in our comments.

The chapters/posts we have planned are as follows. In line with the iterative/agile model of the Web, we reserve the right to change the order and to add, delete, and alter chapters as we progress on this journey.

Finally, the name. "Startup 101" is temporary... and hardly inspired. If you can think of a better name, please tell us in the comments. If we choose your suggestion, your name will go in the Forward in the published book.

As far as we can tell, Kevin Sherman (BubbleGuru on Twitter) must have lovedPop-Up Video back in the 90's, because he has no less than fivedifferent video-in-a-bubble services that you can try out. His highest-profile service, Bubble Tweet, starts with a simple redirect URL that takes you to someone's Twitter page. Almost immediately, a small round bubble appears and starts playing a short video starring the profile's owner. Simple, to the point, fun, and free!

To get started with Bubble Tweet, you don't have to register. Just enter a Twitter account name and record or upload a short video. That's it! You will get a custom Bubble Tweet URL that will show you your recording overlaid on the specified Twitter account. A count is kept for how many visits each Bubble Tweet URL gets. Plus, you can create up to three Bubble Tweet videos a day.

Although at first blush this may seem like a cute little toy that you may try once and then forget about (and in fact, it seems most of the folks who have recorded a video have indeed done that), we think that at the very least it adds a face behind the Twitter account. How many times have you visited someone's Twitter and wondered, is that a person or an ad agency or a robot behind that login? Now you have 30 seconds to shine for your viewer. With a bit of creativity, you could use this free service to answer a weekly question, do a quick movie review, spin in place, or even use it to get people to visit your comedy tour like Dane Cook.

Kevin has taken his bubble-video technology and applied it to a number of different online activities, such as electronic greeting cards (Bubble Joy), enhancing any web site (Bubble Comment), and answering questions (Bubble Guru). In real entrepreneurial form, Kevin isn't sitting still with his goal to get the web wired up with short-form videos.

He's even made a StumbleUpon-style random BubbleTweet page where you can just sit back and watch the bubbles one after another. Good stuff.

Credit crisis. Blah, blah. Cut costs. Blah, blah. Don't you just love it when you get an alarm call from your hotel at 9.15 when your meeting is at 9.00? At ReadWriteWeb we have been sounding alarms about the economy for a year (here, here, here and here...enough already), suggesting strategies to cope with the coming downturn.

But what about now? This is the time to be audacious. The world has changed, totally and irrevocably. Change is the entrepreneur's friend.

Forget About Tsunamis, It's The Little Waves That Matter

I call these Micro Trends. They are not the big obvious trends that everybody is riding - such as mobile, online advertising, search, social networking, globalization etc. If you spotted those 10 years ago, great. Now it is too late. Think surfing. If you see the wave building early on, you get a chance to ride it. If you catch it too late, you get crushed.

How Does The Last Few Weeks Change This List?

For some time I have had a list of Micro Trends on my personal blog. It seems a good time to revisit them to see what might change based on the global credit crisis.

1. Transparency. This wave has been building for a while, but it just got a big boost by recent events. Transparency in financial markets obviously. Then there is Obama's Google for Government initiative. Some of the smartest recent startups we have seen use a mix of technology, insight and hard work to expose the inner working of industries to eliminate information asymmetry and get lower prices for buyers. You can bet that there will be more.

2. Relocalization. We have already written about this here. Tough times will accentuate this trend. The solutions are not obvious (so Momentum VC won't touch them), they could be game changing.

3. Reduced power of gatekeepers. This relates to Transparency. Reduced information asymmetry reduces the power of gatekepeepers/intermediaries/tollbooths. The Financial Services industry is the mother of all gatekeepers. The Economist states that in the early 1980s, the financial services industry accounted for 10% of GDP, but last year it rose to 40%. One change arising from the recent turmoil we can be totally confident about is that the current financial services intermediaries are weakened and new models will arise. Who will do a craigslist on the financial services industry (or at least segments of that vast industry)?

4. Micro-trend Slopes replace Chasms. Alex Iskold started an interesting conversation about whether the Internet has made the Chasm adoption model less relevant. Biking up and down slopes may be the better analogy today. Catch a new trend and you can cruise down a slope, picking up speed effortlessly. As trend-spotting me-too ventures join the race (the Internet spreads ideas instantaneously) the slope flattens out and curves uphill. In good times, a bit of pushing gets you over the top and catching another micro trend slope on the way down. If your up slope coincides with a cyclical down turn (and we are certainly in a big cyclical downturn today), you will get a flat tire and have to carry your bike up the hill and mend it at the top. Don't worry, the other racers will have given up at that point. Starting in a cyclical downturn, make sure you are on a down slope!

5. Changing balance of power between big and small businesses. Yes we have been "banging on" about this for a long time. For the most long-winded description (sorry), read this. This could be the biggest micro trend, even a Tsunami that few people have spotted. Which the current crisis just accentuated. Which the incoming President might actually do something positive about for a change.

6. Self-organizing networks beat command and control structures. This is the story of Enterprise 2.0 - aka, social media meets the enterprise.

7. The end of mass markets. This relates to most of the other trends. Small, niche, specialist will beat mass produced. This is why Etsy may be a big winner from this Web 2.0 cycle. There are probably other opportunities around this trend.

8. Ad $$$ will flow to measurable ROI models. OK, that falls into the no-duh category! But surely Google Adwords is not the only winner in this category? There must be a better ad targeting model out there somewhere? Not better search, you can just use Yahoo Boss for search - that game was totally over well before the credit crisis. But better ad targeting that does not infringe privacy is a big winner.

9. Bubbles will form and pop faster. Bubbles are like booze. With a horrible hangover we say "never again". But guess what.... They don't reappear in the same place until a generation that was bruised has moved on. So the big bubble may be a thing of the past. But we will get lots of small ones. That is kind of like moderate drinking, actually quite good for us. My motto is "moderation in all things, including moderation".

10. The end of 11 point lists. I used to do 10 point lists until a commenter showed me this wonderful Spinal Tap video. Seriously, 10 point lists indicated limits and space on the Internet is unlimited. But then I noticed many people doing 11 point lists. In the spirit of back to basics discipline, 10 point lists will make a comeback.

In our search for that rare beast - the profitable VC backed venture - I interviewed Eileen Gittins, the CEO of Blurb. Blurb does Print On Demand publishing for both consumer and professional markets. They compete with Lulu, which announced today that it is "laying off 24 workers at its North Carolina plant because of the slowing economy". That is 25% of their workforce and includes their President. Eileen and I both had the same reaction: "you mean you only just learned that hard times are coming?!".

Where Were The Alarm Bells When We Needed Them?

Seeing the Blogosphere afire with tales of crisis in start-up land, with emails going from the wise investors to their portfolio companies, makes me think: no duh! Driving with your eye only on the rear view mirror is not smart. I hate to say "I told you so" but some times I cannot help myself. We have been banging this drum for a year. Not that it took a genius to see that a downturn was coming, it was bleeding obvious! We followed up with perspective here and here. When the sky started to fall a few weeks ago we started to look on the positive side.

Of course companies should keep their costs as low as possible. That has been the obvious for centuries. So last week the advice was "spend like drunken sailors?". Seriously, this kind of boom one day, gloom the next reminds me of the crazy behavior that got us into this mess and which, if you want a good laugh, you can watch here or embedded below. By the way, that video was from a year ago!

Blurb Is Just An Old Fashioned Story

The key points that came from Eileen Gittins don't sound terribly interesting, except that in today's world they are so unusual:

1. A "seasoned" management team. Like somebody at the helm who has sailed through a storm before.

2. Aligned with their VC. Some VCs push the "shoot for the moon at all costs" approach. Blurb's backer, Canaan Partners, was aligned with the push to profitability before that was fashionable.

3. Willingness to make trade offs. Sure we all want profits asap. But in the real world there are decisions and trade-offs. These may involve deferring features, leaving a market until later, being more niche than generalist. It is almost always a growth vs profit trade-off ("revenues are vanity, profits are sanity"). The Blurb story is full of those. Now Blurb are in a position to do the things they delayed earlier, while their competition is retrenching.

4. Being contrarian to some degree. Blurb got funded in 2005. They had nothing to do with advertising and you would have to be a spinmeister to call Blurb "Web 2.0". Blurb uses Internet technology (er, who doesn't) to deliver a different value proposition to satisfy a demand that has not changed since Gutenberg. Canaan was clearly ready to be Real VC and back an unfashionable concept.

And, What About The Impact Of The Financial Crisis?

We ask that question to everybody. Eileen Gittins said "we watch the economy like a hawk, because that is what we have always done, it is in our DNA". But so far, so good, they grew in September and the last quarter looks very strong. At least they don't need to go to (more) VCs, who are spending all their time with their problem companies, to ask for more capital. With all the talk of revenue vs profits trade-offs, Blurb grew revenues this year around 3x - not shabby.